Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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..... 47 Figure 24: Outlet Volume vs............................................................................... 53 Figure 28: Vancouver ................... 25 Figure 7: Outlet Representation by Mode........................ 44 Figure 21: Gross Marketing Margin Elements .........................................................8¢ Pump Price) ...................Price History............................ 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) ............. Income............ 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)....................................................................... 34 Figure 15: Monthly Rack Prices: Selected Markets ............................... 24 Figure 5: Canadian Retail Outlet Population ............Price History ............... 24 Figure 6: 1995 Retail Outlets by Province ........................... 63 Figure 34: Montreal .............................. 33 Figure 13: Monthly Gross Marketing Margins......... 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category.................. 16 Figure 3: 1996 Average Regular Gasoline Margins (56................................ 4 Figure 2: 1996 Average Prices/Margins ................................................. 45 Figure 22: Petroleum Gross Product Margins ............................................Price History...............................................Regional & Urban Groupings................................................................................ 30 Figure 10: CPI Index Comparison ............. 29 Figure 9: Annual Gasoline Price (Cents per Litre) ...........................Price History..................................................... 50 Figure 27: Victoria .............................................. 48 Figure 25: Outlet / Volume Relationship .... 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) ........................ Gross Product Margin ........................... 69 Figure 36: Halifax ...........................................................Price History........ 35 Figure 16: Monthly Demand vs...........Price History .........Selected Centres .. 54 Figure 29: Calgary .......................tax................ 42 Figure 19: Pump Price ...............................List of Figures Figure 1: Pump Price / Margin Model..... 71 MJ ERVIN & ASSOCIATES i .......................................... Pump Price (nominal ¢/litre)..... 58 Figure 32: Toronto ................................................... 46 Figure 23: Average Annual Throughput per Outlet................................................. 62 Figure 33: Ottawa ............................................... 56 Figure 30: Regina .............................. ex-tax elements ............................................ 49 Figure 26: Outlet Revenues............................................................................................ 57 Figure 31: Winnipeg ................................................... 40 Figure 18: 1995 Average "Blended" Pump Price ......................................................................................................................................................................................................Price History ................................................................................Price History .Regular Unleaded ........................................... 43 Figure 20: Ex-Tax Pump Price Elements ................................................................Selected Goods & Services ...................................................... Costs..................................Price History...........Price History ...............................Price History ................................. 66 Figure 35: Saint John NB ............................................................................................................................................................................................................................................... 28 Figure 8: Outlet Representation by Service ..... 70 Figure 37: Charlottetown ............................................................................................................................................................... 36 Figure 17: Study Market Methodology ................................................................................1988-1995 .........

................. 51 MJ ERVIN & ASSOCIATES ii ........................ 15 Table 3: Selected Study Markets ................................ 13 Table 2: Taxes on Regular Gasoline on December 31........List of Tables Table 1: Downstream Sales Channels ............................................................................................................................ 1996 .................................................... 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue..........

5 cents per litre on the sale of regular gasoline in a typical major urban market.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56. Natural Resources Canada (NRCan). and a foundation for effective policy development.8 ¢ TAX 28.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.5 ¢ 0. The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold. This study.4 ¢ 19. forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada.2 ¢ 24. and the Canadian Petroleum Products Institute (CPPI). This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs. represented by crude.1 ¢ 5.3 ¢ 28. These prices are determined in a competitive marketplace. the Canadian retail marketing sector realized an average gross product margin of 3. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry. supplier costs and profitability.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996. each with unique MJ ERVIN & ASSOCIATES iii . Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. Price competition occurs at three distinct levels in this industry. and ex-tax pump prices. dealer income. 1996 Average Prices and Margins . together with a separate review of the refining sector. rack.

are examples of ways in which outlet petroleum sales are augmented by other revenues. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. and the traditional automotive service bay. the responsibility for deciding upon retail pump prices resides principally at the local dealer level.500 retail outlets were in operation in Canada in 1995. nine of the past ten years. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. Dealers have a variety of relationships with their supplier. this study focuses on the retail gasoline sector. due to its prominence in the public and media domain. which potentially allow for reduced margins at the gasoline pump. well over half of all outlets in Canada operate as lessees or independents. car wash. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. Approximately 16. Convenience store. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. and declined by 10 cents per litre measured in constant dollars. The resultant margins are therefore a reflection of the state of product supply. compared to about 22. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $).000 in 1989. demand and other competitive factors existing at the time. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). While each of these marketing channels operates in a competitive environment. and accordingly. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. From 1986 to 1995.dynamics.

As a result of these trends. From 1991 to 1996. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994. however. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases.The “tax-included” nominal pump price increased over this same period. MJ ERVIN & ASSOCIATES v .rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991.crude) 5¢ Marketing Margin (retail . as a consequence of refinery plant rationalization (closures) and a modest demand increase. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. and has been a result of several factors including: • • • improved refinery utilization and efficiency. Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . This has both resulted in.

wholesale product cost and freight charges) were isolated from the pump price. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. but also had significantly higher throughputs per outlet. 19 markets representing a broad range of conditions. With few exceptions. This provided for market-bymarket and regional comparisons of key competitiveness indicators. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. A wide range of petroleum gross product margins were evident. were selected for a detailed review of outlet economics. rural markets. several “outside variables” (product taxes. to derive 1995 average petroleum gross product margins for each of the 19 markets. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. This was integrated with selected NRCan price data. MJ ERVIN & ASSOCIATES vi . When petroleum gross product margins were compared to their corresponding outlet throughputs.Comparison of Canada. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. and one by one. although this study provides an independent confirmation of this. With the participation of several CPPI member companies. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. That such a relationship should exist was not surprising. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study.

and in major vs.000. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer.000 2. of which gross product margin and throughput are only two of several factors.000.• Smaller markets performed as competitively as larger centres.962 R2 = 0. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii . revenues from ancillary operations (eg: convenience store. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet.000. smaller markets. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. This study showed that an average outlet net revenue in the 19-market study group was about $70. and his personal labour investment.000 3. brand advertising. These costs would include salaries of marketing representatives and management.000.000.000 5.6624 1.000 Volume (litres) 4. corporate charity. etc. and/or distributed to shareholders.000 6. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. Consequently. an additional goal of this study was to undertake a comparison of outlet profitabilities.000. not poor competition.. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region. supplier profit: after the above costs are allocated. which reflects his investment in the outlet.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool. head office and regional office overheads. sales processing. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.6634Ln(x) + 76.000. the residual revenue is available as profit to be re-invested into retail operations.

The Canadian retail petroleum products industry. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. at 1995 prices.000 $250.000 vs. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers. and that petroleum sales revenues alone.000) $(300. for which this study had no specific data.000) $(150. suppliers likely incurred a net loss on outlet operations in 1995. were insufficient to cover outlet costs.000) $(250.000 $100. respectively. Despite this difference. $61. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii .000) $(100. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.000 $200. after allowing for estimated dealer profit and supplier overhead. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural.000) $(350.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets . Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations.market study group. 1. Although an objective measure of competitiveness is elusive.000 $150. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector.000 $50. distant outlets are clearly higher than those associated with concentrated urban markets. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations. Average Outlet Income (before marketing overhead costs) BC/PR $300.000) $(200.000 per year.$154. by all objective measures available to this study.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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Also. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. Thus. in the long term these fluctuations are likely more reflective of market restorations. despite the predisposition of many observers to use them as such. had petroleum margins which were commensurate with average outlet throughput for that market. Thus. Thus. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. most outlets used in the 19-market study represent major integrated oil companies. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. most markets. this industry sector would have realized profits of unprecedented proportions. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. When these margins were compared to their corresponding outlet throughputs. and the associated industry initiatives which are ongoing in nature.• • • improving production efficiency through refinery plant rationalizations (closures). Also. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). Industry profitability is extremely sensitive to very small changes in pump price. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). these findings clearly show that pump price increases are ultimately linked not to increased profits. if Canadian average pump prices were only one cent higher than they were in 1995. virtually all of the 19 study markets exhibited similar levels of competition. When plotted against the margin-volume model. but to increases in underlying rack prices. crude costs. 7. 8. Indeed. A wide range of petroleum gross product margins were evident within the 19market study group. regardless of size. Outlet throughput is a key determinant of inter-market pump price differences. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . not excessive profits. Both the downward trend in margins. and in turn. assuming all other costs were unchanged. While these economics might appear to place this industry in a position of poor viability. although this study provides comprehensive evidence of this. serve as perhaps the most significant indicators of competitiveness in the downstream industry. That such a relationship should exist was not surprising. based upon an assumed posted rack price. Nevertheless. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre.

This created some economic pressure to sell product at a higher pump price. which could actually inhibit competition. Smaller. 9. and this study showed that gasoline prices were no exception. the solution would be to encourage some dealers to exit the market. in order to build upon the findings in this study towards a full understanding of the dynamics at work.5 million fewer litres of gasoline than a group A (major centre) station. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. isolated markets face particular challenges: although found to be highly competitive. poor outlet throughputs were generally the predominant factor. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. it would seem that if local government in smaller markets were interested in lowering pump prices. reduce pump prices. average pump prices were relatively high. there are three points to consider: • • In very small markets. MJ ERVIN & ASSOCIATES xiii . • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. in order to generate sufficient revenue to cover the outlet’s fixed operating costs.product margins than larger markets. A full-serve retail gasoline outlet typically employs 3-5 staff. The loss of employment represented by a station closure may be of some concern to smaller communities. reducing the number of outlets may also reduce the number of competitors. which should. While competitiveness in most smaller markets was shown to be as active as in larger centres. more isolated markets are generally higher than in larger centres. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. other factors exist which contribute to relatively high margins and prices. thereby improving petroleum volumes and ancillary revenues at the remaining sites. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. • • At first glance. In suggesting this approach however. The costs of most consumer goods in smaller. according to the margin-volume model.

A full analysis of the various features of the Nova Scotia and PEI regulatory structures.10. as it does in the Canadian petroleum marketing sector. and in turn. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). characterized by narrow product margins and relatively flat pump prices. is viewed as an agency which exists to the benefit of industry and consumer alike. MJ ERVIN & ASSOCIATES xiv . Convenience store. many national and local environmental regulations exist for good cause. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. The historical record is clear however: since deregulating pump prices. Retail ancillary operations are a critical element of petroleum price competition. as marketers find even more innovative ways to attract market share. and the traditional automotive service bay. that where a healthy competitive climate exists. the degree of price competition in the retail petroleum has in effect. is well beyond the scope of this study. The federal Competition Bureau for example. under the current PEI regulatory structure. Also. This study proposes rather. As these findings show. depressed petroleum revenues. possibly to the detriment of the consumer. will likely preserve a highly competitive petroleum market. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. car wash. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). and the perceived effect on their markets. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. direct regulatory interventions may have an adverse effect on competitiveness. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. and as such. Charlottetown. are an acceptable limitation on pure competition (Finding 8). is both the cause and consequence of increased activity in ancillary operations. and likely others in Nova Scotia. sometimes below that of outlet operating costs. does not appear to benefit in consumer terms. 11. the Halifax market. has seen a decline in pump prices relative to other Canadian markets. This competition then. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results.

1. 2. This should be in the form of a quarterly summary of price trends and related measurements. • • MJ ERVIN & ASSOCIATES xv . margins and competitiveness factors. using Canadian and foreign selected markets. petroleum marketing competitiveness. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. using Canadian and foreign selected markets. in a simple format designed for consumers and legislators. A regular comprehensive competitiveness evaluation. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. Improve public understanding and awareness of competition in the petroleum marketing sector. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. not inhibit. along the lines of the model used in this study. Public perception measurement. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. and the nature of competitiveness influences. Develop cooperative industry research into marketing sector competitiveness issues. and the converse image held in much of the public domain. would ultimately be reflected in carefully-considered public policy which serves to truly enhance.

A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. by industry. and in particular. • * * * Better understanding of this industry. using Canadian and foreign selected markets. MJ ERVIN & ASSOCIATES xvi . Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. and regulators alike. and issues/opportunities facing such markets. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. consumers. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue.

including a regional. and a challenging array of potential environmental initiatives.. which comprise the “downstream” oil industry. or even communities within the same region. Specific purposes of this study would be: • • • • “.to better understand the competitive opportunities and challenges. or petroleum marketing portion of the study. and Industry Canada was convened to undertake this project. .. and in comparison to the Canadian national average and nearby USA markets”.. competitive pressures from US and offshore refiners.. A working group represented by Natural Resources Canada (NRCan).Introduction Background Canada’s petroleum refining and marketing sectors.” MJ ERVIN & ASSOCIATES 1 . leading to more effective policies and reduced uncertainty for future investment.to determine the key factors which drive competitiveness in specific markets.to provide a sound database upon which more effective policy decisions can be made.. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions..to draw comparisons with nearby USA markets.. more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump.. .” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made. to name a few. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry. In 1995. and in the process. and that issues and challenges be identified so that conclusions and recommendations can be made “.to help the industry cope and to enhance competitiveness.. the Canadian Petroleum Products Institute (CPPI). Project Objectives The working group established as the primary objective of this study “.. and regional differences which face the petroleum products retail industry... provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector. and . Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry. The SCF laid the foundation for supplementary studies. face a number of challenges: a poor public image.to analyze the rack to retail market and the market structure for refined petroleum products. region by region across Canada. and MJ Ervin & Associates was selected to undertake the “rack to retail”.

Unless otherwise stated. undertaken as part of this project to: • make a more detailed examination of price. and a foundation for effective policy development. Part C: Historical Trend Analysis provides an overview of prices. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. Specific comparisons of specific Canadian and US consumer markets were not made. or which have a specific meaning in the context of this report. It also relates consumer demand patterns to pump price fluctuations. in Appendix I. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). • Part E: Conclusions and Recommendations summarizes the study findings and. presents conclusions and recommendations which arise from the study findings. Part D: Selected Market Study presents the findings of a diverse 19-market study. and the effect of competitiveness on each subsector. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. Many of the findings in this report are presented in graphical form. Findings are stated in bold and are summarized in part E of this report. Supporting data to these charts can be found in Appendix II. margins and demand patterns over the past several years. Ultimately. and in order to provide insights into the range of competitive dynamics that can exist. from which some important findings are made.The study meets these objectives. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. The study does provide comparisons with US markets on a national level of detail. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. due to the considerable data gathering difficulties that such an approach would entail. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . through a multi-faceted approach.

Consumers Association of Canada. • • Several organizations participated in two key review sessions. Suncor Inc. assisted in securing the support and participation of member companies in the selected markets phase of the study.. and their 481 retail associates whose outlet data was used in our analysis. NRCan... MJ ERVIN & ASSOCIATES 3 . We gratefully acknowledge these companies.. Shell Canada. and provided critical guidance and feedback at several key stages in the process. facilitated some of the data gathering needs of this study. and Shell Canada. Suncor Inc. Petro-Canada. for their assistance. The Canadian Petroleum Products Institute. These included: Canadian Tire Petroleum. Imperial Oil Ltd. Ministère des ressources naturelles du Québec. including Ultramar Canada. CPPI. Ontario Ministry of Environment and Energy. through Maureen Monaghan and Huguette Montcalm. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). through Bob Clapp. Environment Canada.• Industry Canada. chaired the steering committee. and also participated in the steering committee. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. Natural Resources Canada. Finally. Petro-Canada. and Industry Canada.

To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. as this study shows. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases.which is used by many groups and individuals to assess the competitiveness of the petroleum industry. most Canadians relate to this industry in one specific way: as consumers. the particular quality of gasoline which is of most interest to consumers is not its colour. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . And. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. In fact. unlike many consumer products. and serves to explain several factors that together determine retail gasoline prices at any given time.price . its price. as they are in Figure 1. These relationships can be modeled. It is this particular feature of petroleum products .Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. principally of motor gasoline. texture. multifaceted industry. or taste. but simply. Yet.

From an industry perspective. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. consumer perspective. evaluating competitiveness is therefore a partly subjective process. and in fact inextricably related. MJ ERVIN & ASSOCIATES 5 . Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard. (implying that the stated margin represents net income or “profit”). While both perspectives are valid. Ultimately however. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. “competitive” may be synonymous with “viable”. an understanding of the term itself is necessary. Before examining each of the model elements. While this term is often associated with the phrase “profit margin”. these stakeholder revenues are derived from the revenue from the retail sale. it is important to define the term “margin”.from the total pump revenue. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product). each essentially taking a share1 . Each margin is quantified by its defining prices. margins are squeezed or expanded accordingly. A consumer however. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. So defined.Many of the terms introduced and explained in this section are used extensively throughout this study. objective measurement for competitiveness. this study’s use of the term relates to gross margin. any operating expenses must then be considered before making any determination of profits. gross margin represents revenue only. Gross margin is simply the difference between two price points. but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. is more likely to equate the term with “value for money”.or margin . this study examines competitiveness from the latter.

Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. 1986: “Competition may mean very different things to different people. represents a process by which prices are set. To achieve this. is the only real option in the long term.. Accordingly. the degree of competition within a market. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors.” Price Competition in the Oil Industry In order to assess competitiveness. and ideally many entities offer the same or similar products (brand variety). it can frustrate communication and obscure analysis. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . reducing costs. or in other words.” “.Unlike many business or economic concepts. Conditions for a competitive market can be deemed to exist when: • • more than one. in the sense in which it is something in the public interest. Technological change and innovation are the large levers of competition in industry. Inevitably. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). Competition can only be sustained therefore. improving efficiencies. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. in order to maintain some level of brand variety. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. Price competition. Since a competitive market effectively limits the price option. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. a universally acceptable definition of competitiveness is elusive. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. The actions by business rivals place an upper limit on the prices a firm can charge for its products. the result of price competition is reduced profit. Simply put. this usually requires a reasonable number of competitors. and the entry of new competitors and new ideas. competitors can either restore higher prices or reduce costs. An effective functioning of markets also permits smaller competitors to expand if they meet the test. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. More importantly. and unless care is taken to use the word precisely. provide some means for comparing the type and to some extent. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May.. if market conditions allow a sufficient number of players to remain profitably engaged. one must ask how marketers compete. as competitors seek to attract market share through lower prices.

and Promotion. competition in the crude and rack markets deserves some mention. Nevertheless. the most effective of these as a competitive tool is price. Basic Marketing: A Managerial Approach. particularly in the crude (upstream) industry and refiner sector. commonly known as the “marketing mix”1. some organizations have operations in two or more of these markets. 1960) 2 Although distinct.: Richard D. (Homewood. Within the broad context of the oil industry. most Canadians relate more in terms of retail gasoline marketing. and as will become more evident in this study. and are beyond the scope of this study. the “oil industry” consists of two distinct industries: the upstream industry. Jerome McCarthy. 1971). where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. New York.the variables at their disposal. p. and in retail markets. the raw material from which gasoline is made. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. The dynamics of upstream and refiner competition are major studies in themselves. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. MJ ERVIN & ASSOCIATES 7 . where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners.. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. whose main activity is the exploration and development of crude oil. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets.44 (1st Dec. A refiner in Toronto may well compete with a refiner in Buffalo. which in turn defines the margins. The converse notion that the industry establishes a “should be” margin. or four P’s: Product. Ill. In fact. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. Place. and are generally known as integrated oil companies. which in turn defines a proper market price. It is also important to stress that the market ultimately sets rack and retail pump prices. whose main 1 E. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. Irving. the geographic scale of competition is an important consideration. Given the commodity nature of petroleum products. • Thus described. is false. and the downstream industry. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. 4th Ed. Price. in rack markets. so a brief description of these.

which gives an accurate portrayal of month-to-month crude price fluctuations.the raw material from which gasoline is made. Infrastructure The upstream oil industry encompasses a broad range of operations. that is to say. due to variables such as crude quality. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. Canadian producers must compete to sell their production to refiners. and transportation of crude oil to the refinery plant. and refinery production methods. as a minor contributor to the world crude supply.activity is the refining of crude oil into petroleum products. our crude prices rise and fall according to price benchmarks established far beyond our own shores. it is probably sufficient to say that. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. production. Crude oil is a commodity which is traded in a global marketplace. consequently. Canadian producers have virtually no influence over world crude prices. from the exploration for potential crude or gas reserves. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. The upstream industry’s crude price is represented in Figure 1 as elastic. rather than a fixed value. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. MJ ERVIN & ASSOCIATES 8 . alongside major producing countries such as Saudi Arabia. Within the scope of this study. While this study focuses on the downstream industry (and in particular. Although this industry is not the focus of this study. implying that it fluctuates. it is important to examine its relationship with its neighboring downstream industry. and in the open market structure that exists in Canada. its marketing operations). Canadian producers are known as “price takers” rather than “price setters” of crude prices. drilling. and the delivery and sale of these products to the consumer. In providing historical comparisons of crude to rack/pump prices. gasoline grade. in several commodities trading centres around the world. which it does on a continuous basis. which finds and produces crude oil .

involving energy. or roughly 34 percent of the pump price. is the provincial government. From this revenue. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. in the petroleum sector. and pay out royalties to the resource owner. The focus of this study is on the marketing sector of the downstream petroleum industry. As is typical of many manufacturing organizations. and some attention to the refiner sector is therefore given here. and numerous safety and environmental safeguards.While some suggest that the price of gasoline should rise and fall exactly with the crude price. diesel. personnel. and hopefully realize some production. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. crude is only one of several factors that influence pump prices. day-to-day plant operations are cost-intensive. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. In addition. This sector acquires crude oil. its predominant feature is the plant facility which. drill for. heating fuels. oil producers must explore for potential reserves. A modern refinery is a sophisticated work of engineering. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. maintenance. MJ ERVIN & ASSOCIATES 9 . was 19. and from this feedstock. buy refined products from the refiner and sell them to the end-use customer. as a factor of the regular gasoline retail pump price. who manufacture petroleum products from crude oil. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. and lubricants. put simply. which in oil producing provinces such as Alberta.1 cents per litre. and marketers who. is called the refinery. As a general measure: Finding 2: 1996 average crude price. manufactures a range of refined petroleum products including gasolines.

this model only uses the benchmark crude value. While refineries are always rack price points. 2 MJ ERVIN & ASSOCIATES 10 . external measurement of the current market value of a particular petroleum product. confidential terms between the seller and specific buyers. only rack price information is readily available in the public domain. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. but with no material effect upon the Gross Product Margin derivation. 1 Dealer Price is not included here. For a competitive rack market to exist. reflecting the cost of transporting the crude from the producing region to the refinery plant. The existence of rack price in a given market is not of itself. which can be broadly categorized as follows1: • • • rack price . as they relate to negotiated. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. representing major Canadian population centres. the gross refiner margin is elastic. Wholesale volume data is not readily available on a market-specific basis. they use rack price as their basis.the price charged for immediate supply on an “as available” basis. since the market-driven rack price provides an objective. indicative of a competitive wholesale rack market. and accordingly. the gross refiner margin is the price at which the refiner sells its refined product. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. For simplicity. the relative competitive strength of any given rack market is difficult to assess. which provides an independent and objective determination of rack-based gross refiner margin. refiners sell their product under a variety of arrangements. If for example.Price/Margin Model Elements For simplicity. In fact the refiner typically pays a higher price than the benchmark crude price.this is the “internal” price charged by a refiner to the marketing arm of the same company. less the price at which it bought its raw material2 (rack price minus crude price). some clear competitiveness indicators exist. and a return on the considerable capital investment in the plant facility.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. Although contract and transfer prices are distinct from rack price. Since both crude and rack prices fluctuate according to market forces. On a national basis however. Contract and transfer prices are not openly shared. This margin provides for plant operating costs as described above. there would be little or no market-driven competitiveness in the refiner sector. Of these three refiner prices. many of which do not have integral refineries. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. as this price point exists within the marketing sector. transfer price . In simple terms. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. contract price . not the refiner sector. which may cause Gross Refiner Margin to be slightly overstated. In fact. being squeezed or expanded between these two price points. a considerable volume of petroleum product must actually trade using rack price as the transaction basis.

due to the relatively small transportation cost. The mechanisms that drive rack prices are more fully discussed on page 36. from any one of several regional refiners. and in the case of gasoline. In these cases of so-called “integrated” refiner-marketers. petrochemical producers. integrated refiner-marketers establish transfer prices at. but where pipeline or marine fuel terminal facilities exist. the question of the internal selling price. as there is no obvious market mechanism to regulate its setting. Integrated Refiner-Marketers In Canada. to so-called “independent” petroleum marketers. wholesale refined product is bought and sold across very large distances. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. to major industrial consumers.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. many US and European refineries are in practice. 1 Based on Octane Magazine Retail Outlet Survey data. or close to. Canadian refiners must therefore be price competitive not only with each other. for example. who compete for a share of this demand. or transfer price. would produce better than expected refiner income. In practice. market-driven rack prices. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. potential sources of wholesale product supply for most Canadian non-refiner marketers. most refiners also participate in the marketing and retailing of petroleum products.000 km) for overland truck transport. in order to maintain realistic accountabilities within each of the two sub-sectors. market-driven Rack (wholesale) pricing of petroleum products. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. arises. but with their US and European counterparts. As shown in Figure 15 (page 35). These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). who themselves do not refine petroleum products. but at the expense of marketing income.for example. and which supply petroleum to about one-third of all retail outlets in Canada1. even overseas. In examining the structure of the Canadian refiner sector. In practical terms. this limits a marketer to a relatively short range (perhaps 1. MJ ERVIN & ASSOCIATES 11 .

Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. and aviation. Retail Sales to the domestic motorist. For this reason. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. as a popular and relevant “window” on the petroleum marketing sector. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. and purchase at or near the established rack price. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. It is this sector which has direct contact with the petroleum consumer and it is this sector. home heating. trucking. which “sets” the retail price of gasoline. product is sold from a central facility. • • MJ ERVIN & ASSOCIATES 12 . in the minds of many consumers. and who essentially deal directly with the refiner. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. each with its own distinct infrastructure. Marketing operations within this sector can be broadly classified into three elements. Within this industry sector. media and regulatory attention. the most recognized element of the downstream oil industry. farming. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. or in the case of cardlock facilities. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. principally into commercial trucking operators’ vehicles. Wholesale Sales to a wide variety of customers. including mining. gasoline price and competitiveness issues attract considerable public.

such as product transport and/or storage. and regular gasoline in particular. typically at the “rack point”. and usually supply customers by delivery to the customer’s own storage tank. often delivered by pipeline or ship/barge. In major centres dedicated Home Heat centres provide this service. These outlets usually have considerable inventory capacity. There are about 16. according to the contractual relationship between the supplier and the dealer. using delivery tank trucks. There are over 850 cardlock outlets in Canada. Sales to major industrial accounts. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. Sales of petroleum products through bulk sales outlets. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. to the aviation fuel consumer. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. Sales of petroleum products (principally gasoline) through retail gasoline outlets. Retail outlets are operated in a variety of modes. as principal elements of petroleum marketing operations. MJ ERVIN & ASSOCIATES 13 . at a negotiated contract price. Sales to non-refiner petroleum marketers. usually involving some aspect of the marketing sector infrastructure. one final element of the pump price model must be reviewed. by delivery tank truck. Sales of home heating fuels to residential furnace oil customers. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier.300 bulk sales outlets in Canada. Direct sales generally do not involve any marketing sector infrastructure. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. for example. as discussed. Sales to spot buyers at posted rack price. in smaller centres. Sales to commercial and industrial accounts by the wholesale marketing sector. which primarily serve long-disttance truckers and commercial delivery and haulage operators. There are over 1. Before examining this sector in detail.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. Sales of aviation fuels at major and secondary airports across Canada. to the motorist consumer. heating fuel delivery is an integral part of a bulk sales outlet. which is generally less than the rack price.500 retail gasoline outlets in Canada.

1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues. municipal taxes.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. the tax content of the petroleum price is essentially a pre-determined. stable amount. the tax content of retail gasoline in Canada has increased steadily over several years. provincial sales tax.2 cent (0. The petroleum industry acts as a collector of these taxes. 1 Due to the application of GST (and in Quebec. regardless of market conditions. or roughly 50 per cent of the pump price. would include a roughly 0. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1.3 in Quebec) drop in the tax content. in a small number of markets. MJ ERVIN & ASSOCIATES 14 . Table 2 shows the provincial tax content for retail gasoline. If the pump price decreases for example. PST). which amount to 28.6 cents per litre (Canada 1996 10-city average). As part C of this study shows. typically made up of: • • • • a ten cent per litre federal excise tax. tax content does fluctuate somewhat with pump price changes. and seven percent GST. for example. A three-cent drop in pump price.

An additional pump tax of 1.0 15.0 cents is charged in the greater Victoria and Vancouver areas respectively.8 4.0 9.6 3. MJ ERVIN & ASSOCIATES 15 .0 28.1 32.3 27.0 10.0 10.Table 2: Taxes on Regular Gasoline on December 31.0 16. plus a 6.0 10.0 GST content (7% of pump) 3.6 3. All Quebec gasoline sales are subject to a 15.0 11.2 cent per litre pump tax.0 27.5% sales tax applied to the GST-inclusive pump price.0 10.5 cents was introduced in the Montreal and surrounding area in 1996.3 10.0 3.0 3.6 25.9 3.0 10.2 10.8 note 1 note 2 An additional tax of 1.7 30.7 3.0 10.5 14.0 10.0 10.0 10.5 6.6 3.2 24.6 22.1 25.0 10.2 24. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.4 3.5 12.3 Federal Excise Tax 10. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.5 3.6 3.0 28.3 20.5 Total Tax 24. Provincial Tax 11.0 4.0 14.7 13.7 18.0 10.5 cents and 4.0 10.

some profit return for the shareholder.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry. namely the dealer’s costs and income.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.1 cents per litre. or 34 percent of the pump price. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average). was available for product marketing operations.3 cents per litre. based on regular unleaded gasoline. The residual. It also provides an overview of the industry in terms of several infrastructure parameters. MJ ERVIN & ASSOCIATES 16 .2 ¢ 24. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements. the brand supplier’s costs. and potentially. to derive a representative value for regular gasoline gross product margin in Canada. or 9 percent.8 ¢ TAX 28. 3.5 ¢ 0. or 50. Refiner operations realized 5.5 cents per litre (after freight cost). and ancillary operations.1 ¢ 5.3 percent of the average regular gasoline posted pump price.4 ¢ 19.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56. Upstream operations realized 19.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28. including retail outlet distribution. and the retail gasoline sub-sector in particular. operating modes. Figure 2: 1996 Average Prices/Margins . this section provides a view of the Canadian petroleum marketing sector.3 ¢ 28.6 cents per litre. This 1 Prices and margins reflect a Canadian 10 city average.

petroleum taxes accounted for 50. it falls into the domain of the marketing sector. The gross marketing margin. and is then transported to the retail outlet. is the second of two elements of the downstream oil industry. The marketing sector then. In referring to marketing margins and product margins. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. was 5.3 cents per litre. and rack price. Freight MJ ERVIN & ASSOCIATES 17 . It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. and it is depicted in Figure 1 as a fixed cost element. In 1996.gross product margin represented 6 percent of the Canadian average regular gasoline pump price. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. As the product leaves the refinery plant.5 cents per litre. as part C will describe. In 1996. Both refiner and marketing margins have been in decline over the past several years. which in the case of retail gasoline. See page 10 for further explanation. for example) is sold/transferred at the current rack or transfer price.3 percent of the average urban price of regular gasoline in Canada. Although many petroleum marketers conduct their own freight operations. is usually the gas station. is defined by the marketdriven price points of ex-tax pump price. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. Based on the 1996 data. Bloomberg rack price values were used as the assumed wholesale price. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. three key findings can be stated: Finding 4: Finding 5: In 1996. or “rack to retail” margin. and is often out-sourced to third-party common carriers. was 3. the finished product (gasoline. Freight cost does not typically fluctuate. this is seen as a “non-core” business.

but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. as it represents 80% of all retail gasoline sales.6¢ Refiner Operations 5. • Product sales: Within this domain. Unlike most other retail enterprises however. Posted pump price includes all of these variables. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products. but at an average cost of over $200. storing and dispensing a product such as gasoline adds considerably to the operating cost.5¢ Product Operations Freight 0. incur a variety of costs. Figure 3: 1996 Average Regular Gasoline Margins (56. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). as it excludes the “outside variables” of tax. an average gross product margin for regular gasoline in a major Canadian city was 3.5 cents per litre in 1996.8¢ Pump Price) Upstream Operations 19. freight. Gross product margin is therefore defined as gross marketing margin less freight cost.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. As represented in Figure 3. This is a particularly useful measurement in comparing retail gasoline markets. and upstream/refiner margins. typical of any retail business. petroleum marketers. which are typically close to a wholesale rack point.3¢ 3. and is therefore a poor comparative tool.costs are generally less than one-half cent per litre in most major Canadian cities. together with gas station dealers.000 per outlet.1¢ Tax 28. rural markets experience higher pump prices than do larger centres. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 .

additives.44 (1st Dec.). page 24).. Although revenue from this product is factored into the study market economics in Part D.” or four P’s: Product. In order to measure competitiveness. and 9 cents per litre for premium gasoline. 2 E. 1 Diesel is another petroleum product sold at many retail outlets. but most consumers view gasoline as a commodity. Simply put. Price competition has forced marketers to optimize outlet revenue. 1960) MJ ERVIN & ASSOCIATES 19 . marketers have attempted with some success to differentiate their product offerings from other brands. marketers compete to be represented in as many and/or the best locations as possible. Price. 4th Ed. rather than the most places. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. expanded product/services offerings such as convenience items. as gas stations proliferated. gasoline). propane vs. (Homewood. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. it represents a very small percentage of total retail petroleum sales. a number of factors preclude this type of strategy. Place. A portion of the market certainly responds to this type of competitive strategy. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. Place Typically. and Promotion. or when comparing price levels between markets. Higher octane grades are more expensive than RUL. seasonal blends. Jerome McCarthy. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. commonly known as the “marketing mix2. Today. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. but in 1995 was typically 5 cents per litre for midgrade. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. The grade differential varies somewhat from city to city. RUL prices are therefore most often cited when relating historical price trends. and the price difference between these grades and the RUL price is referred to as the grade differential. Today. competitive activity can be observed when a marketer alters one or more of the variables at their disposal. Ill.retail gasoline sales respectively1. competitive strategy of this type focuses heavily on selecting the best place. 1971). • Product In the past decade. Irving. This study does not examine such a broad issue however. p. marketers compete for the consumer’s choice of transportation energy (for example. one must ask how marketers compete. etc. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level.: Richard D. will ultimately purchase based on price. and accordingly. Basic Marketing: A Managerial Approach.

promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. Establishing an objective measurement of price as a competitiveness indicator however. due to the largely commodity nature of petroleum product. In this context. free item with purchase or special price item with purchase. Promotion In the gasoline retailing sub-sector. and more importantly. • • • While examples of all of these indicators are abundantly in evidence. MJ ERVIN & ASSOCIATES 20 . is less clear.contrary to some public perception. price clearly remains the predominant competitive tool used by Canadian gasoline marketers. low prices and/or margins.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. their subsector margins. Examples of promotional competition are: • • • brand identity gasoline discount coupon. price has proven to be the most widely used competitive tool by gasoline marketers. volatile prices . volatile pricing manifests itself in the form of a price war (see below). Consequently. uniform prices . • Price In most markets. gasoline is a commodity. and therefore “trades” within a relatively narrow price range. This study presents an extensive historical and comparative analysis of pump prices. At its extreme. probably due to its relatively high cost. caused by price competition. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. this study examines the dynamics of price competition in considerable detail. As such. gasoline is viewed by consumers as a commodity uniform in quality and widely available. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. Examples are: • prominently displayed prices . fluctuating pump prices are a significant indicator of robust competition among marketers.while uniform pump prices are sometimes cited as evidence of industry collusion. and due to the already slim margins available to marketers.• • closure of non-viable outlets. Promotional activity seems to have decreased in the past few years.

When this occurs.When pump prices are uniform. since there is no “dealer margin”. or even being squeezed to zero . MJ ERVIN & ASSOCIATES 21 . There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. in order to maintain a reasonable market share. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs.where the ex-tax pump price is equal to. assuming that the rack price is unchanged. Whether through falling pump prices or rising rack prices. Pump prices therefore tend to move uniformly within a very short time. In the case of lessee or independent dealers however. Price Support In times of “normal” pump prices. competitors may not follow. the relationship between the supplier and dealer is generally as described on page 25. If the posted price increase is too high. or even less than. Finding 7: Price uniformity and price volatility. adjacent dealers. in an attempt to gain market share. While this support may take one of several forms. are indicators of a competitive market. the effect on many consumers is immediate: they will drive into that station. for example). A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. or even undercut the competitor’s lower price. but to competitors. one must adopt the perspectives of both consumers and competing. obviously at the expense of the supplier margin. the supplier may temporarily intervene. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. Pump price signs are an ubiquitous feature of the retail gasoline industry. competitors will likely match this price. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. facilitated through street price signs. bypassing the higherpriced outlet. If one dealer decides to reduce pump prices (by two cents. To understand the phenomenon of uniform pump prices. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. and provide to the dealer what is commonly referred to as price support. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. its effect is to restore some measure of the dealer margin. The effect of this upon the gross marketing margin is obvious: it is squeezed. who then react quickly to the change. or when prices rise or fall apparently in unison. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. This is a misconception. The other dealer has little choice but to quickly match. 1 This does not occur at company operated or commission outlets. since they too must restore their gross product margins to sustainable levels. the wholesale rack price.

Following a year-long investigation. control over retail pump price effectively reverts to the supplier. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. These cases have largely involved local dealers and/or isolated incidents. however. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition.Under the provisions of some price support mechanisms. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. While this study does not intend to undertake a detailed review of the effect of the Act. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. An examination of the effect of the Competition Act. 1997 MJ ERVIN & ASSOCIATES 22 . is beyond this study’s scope. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. or of direct government intervention in marketing. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. which is administered by the federal Competition Bureau (Industry Canada). 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. provincial and even municipal levels. More recently. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. A review of historical retail pump prices in the Halifax. and a brief discussion of this case appears in part D. but reverts back to the dealer when the support arrangement is ceased. In addition. the Bureau found that there was no evidence to support these allegations1. the petroleum marketing sector has been the subject of several inquiries at federal. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. There are few current examples of direct government intervention in the pricing of petroleum products. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. In addition. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. resulting in 9 convictions. Price maintenance: where a supplier exerts upward influence on prices upon a dealer.

or incentive for. exit from an non-viable market. it is clear that government policy plays an important role in facilitating. particularly in smaller population centres. and is the single largest market for gasoline products. These regulations clearly exist to the benefit of all. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. inhibit competition. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. and consequently. creates an obstacle to.500 retail gasoline outlets across Canada. for safety and environmental protection. This issue is discussed more fully in part D. It is important to acknowledge that many regulations affecting the retail gasoline industry. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. entry into an attractive market. creating a need for higher margins. accounting for 41% of all petroleum demand. accounts for about 37% of all refined petroleum demand in Canada. As a product group however. one can cite examples of regulatory obstacles to exit from the retail gasoline market. as outlined above. higher pump prices. or incentive for. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. A practice. accounting for roughly 88% of all gasoline demand. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. it is the single largest one. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. that is. a competitive climate. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). is in part. So defined. Retail gasoline sales. promotes or limits market-driven pump prices. Conversely. to some degree. and at least some of this capital cost is regulatory compliance-driven. MJ ERVIN & ASSOCIATES 23 . Many smaller retail owner-operators. but exist to meet other important societal needs.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. or inhibiting. The high cost of building a modern retail gasoline outlet for example. in the form of standards for the decommissioning of retail petroleum sites. sales of gasoline through the roughly 16.

Figure 5: Canadian Retail Outlet Population .it has no practical means to enumerate each and every outlet. This study provides an estimate of the actual retail outlet population.2% Asphalt/Coke 4.9% Diesel Fuel 22.452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey.Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6.9% PetroChem Feedstocks 5. as shown in Figure 5.7% Light/Heavy FuelOils 14.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 . This survey accounts only for major established retail networks .7% Lube/Grease 1.6% Other Gasoline 4. nor is there any federal or uniform provincial enumeration of retail gasoline outlets.2% Retail Gasoline 37.2% Propane /Butane 2.3% Total Sales Volume: 84.2% Other 0.

controls the setting of the pump price. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. as owner of the product. and this is of some importance with respect to the matter of prices and competition in this sector. Several possible relationships. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 .The estimated number of retail outlets in Canada has declined from 22. exist between retail dealers and their suppliers. and all inventory and revenues belong to the supplier. and the dealer.000 outlets in 1989. There are two main stakeholders involved in the marketing of retail gasoline: the supplier. using Octane counts only) is roughly equivalent to population densities. Distribution of these outlets by province (Figure 6. who manages the day-to-day operations at the retail outlet. to about 16. The principal dealer and attendants are salaried employees of the supplier. the retail outlet is owned and operated entirely by the product supplier.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. or modes. as one might expect.500 in 1995. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. The supplier. who holds initial title to the refined petroleum as it leaves the rack point. and usually owns the brand name seen at the retail outlet.

but the outlet operator (“dealer”) is compensated by a commission payment.the entire gross product margin accrues to the brand supplier. The dealer in turn hires attendants. supplier salary from supplier. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. usually based on cents per litre of petroleum sales. the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. the supplier retains control of the retail pump price. Since the supplier owns the petroleum product at this type of outlet. who pays all outlet operating costs. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. the outlet facilities and petroleum inventory is owned by the supplier. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 . Control of Pump Price Dealer Compensation supplier a commission from the supplier.sub-component margins . The “dealer” is in essence. an employee of the supplier supplier supplier typically the dealer. based on pump sales volume. and pays them from his commission revenue.

MJ ERVIN & ASSOCIATES 27 . and means of compensation supplier. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. This dealer margin is defined as the pump price (ex-tax). and sells at the posted pump price. and in turn resells to the motorist consumer at a higher pump price established by the lessee. and has control over the retail pump price. The margin between these two prices is the dealer’s gross revenue. can vary considerably from one supplier to another. The margin between these two prices is the dealer’s gross revenue. dealer-established retail price. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. less the Dealer (wholesale) Price charged by the brand supplier. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. The dealer pays most or all of the expenses associated with operating the outlet. the retail facilities are owned by the dealer. This Dealer Price.product from the supplier at a “Dealer Wholesale” price. since it is predicated on contractual arrangements between the dealer and the supplier. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. not the supplier. unlike rack or pump prices. and sells at the posted pump price.

or Imperial Oil). Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. 1 Unless the dealer is under a price support arrangement (for instance. who themselves establish pump prices. some general figures are mentioned here. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. Petro-Canada. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. during a price war) as previously described. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. The remainder represent one of over 50 different marketer organizations. In addition. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. and fully two-thirds operate as lessees or independents. MJ ERVIN & ASSOCIATES 28 . virtually none of the major integrated outlets are company operated. This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace.

which in part has led to a reduction in retail product margins. Most ancillary services are operated by the dealer/lessee. ancillary service has had the consequence of subsidizing the pump price of gasoline. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. and is a result of. Figure 8 depicts the Canadian representation of several key ancillary services. average annual throughputs ranged from under 1 million litres in smaller population centres. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. these study findings show that this can vary widely from market to market. Canadian throughputs have dramatically improved in the past several years . to over five million litres in major markets such as Toronto. These improved outlet throughputs have provided for improved petroleum revenue potential. Based on a sampling of outlets surveyed in this study.While an average outlet throughput may be in the order of 2. In fact. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. Improved outlet revenue from ancillary operations has caused. has had a profound effect on the retail gasoline marketing sector. Many outlets have more than one ancillary offering: many “flagship” outlets for example. more fully described in part C.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 .5 million litres. feature both a large-area convenience food store and a modern car wash facility. reduced petroleum margins. In effect.

An “all markets” average. prices are for regular unleaded (RUL) gasoline. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. MJ ERVIN & ASSOCIATES 30 . This part examines broad trends in several areas. Since 1 Data is not regularly collected on smaller markets. While some of the presented findings are selfexplanatory. the “Canada average” price reflects an average of urban markets only1. using a Canada 10city weighted (by provincial demand) average. mainly using Canada average values. Since rising prices are common to most consumer goods and services. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. and with which the reader should be familiar.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. many utilize terms which are explained in part A. as can be seen in part D of this study. when the Persian Gulf War caused crude prices to increase significantly. Unless noted. including smaller markets. This shows that pump prices have increased in nominal terms. an examination of the specific historical record of gasoline prices is useful. As such. particularly around 1990. would be somewhat higher. Regional and market-to-market comparisons are presented in greater detail in part D.

ex-tax equivalent prices. MJ ERVIN & ASSOCIATES 31 . and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. When pump prices are reduced by the amount of tax content. In constant dollars. and relative crude cost. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). It also depicts the associated margins. rack price. as in Figure 10.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. Figure 10: CPI Index Comparison . fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. When compared to other consumer goods. nominal pump prices decreased. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. retail pump prices were about 7 cents less in 1995 than they were in 1986.1990. as defined in part A of this study.

and in fact have displayed a declining trend over the past six years. In fact. as might be suggested. then one might expect margins to be quite constant over time.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. are principally a reflection of changes in the underlying price of crude oil. and the rise in the tax content. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. It is important to state that pump price changes do not occur in exact lock-step with rack prices. which in turn. Figure 12 shows that industry margins have not been constant over time. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. the presence of these additional market factors have operated to the benefit of consumers. Margin History While Figure 11 provides an indication of key price trends. it simply passes on a fixed cost margin to determine the “correct” pump price. nor do rack prices exactly follow crude costs. as the next section shows. the downstream industry operates on a “cost-plus” basis. MJ ERVIN & ASSOCIATES 32 . which are defined by the price points. as shown in Figure 12. as Figure 11 shows. that is. it is also useful to examine the behavior of margins. due to additional market factors which affect pump and rack prices at any given point in time. and have risen slightly since 1994. If.

Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. and has been a result of. The decline in refiner and marketing margins has both resulted in. compared to the Canadian average. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. 1 In fact. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . MJ ERVIN & ASSOCIATES 33 . several factors. which have both shown a consistent decline throughout the period 1991 to 1996. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. the gross marketing margin can fluctuate quite significantly1. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. the actual fluctuation is much more pronounced than shown.crude) 5¢ Marketing Margin (retail . This shows that on a monthly basis. In particular. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. as local competitive factors act to self-regulate pump prices. not weekly or daily data. Finding 13: From 1991 to 1996. this upward trend is not attributable to “downstream” refiner or marketing sector margins. A more thorough discussion of specific market factors for these and other centres appears in part D.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. since the chart is based on monthly averages. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases.

Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . resulting in significantly higher Canadian gasoline prices. if not all of the difference in pump prices between Canada and the US. although Canadian pump prices in urban markets are clearly higher than in the US. this is wholly attributable to the difference in taxation.Figure 13: Monthly Gross Marketing Margins. US pump prices. US Price History The retail gasoline tax structure in Canada is vastly different than the US. or even less than. A comparison of Canadian and US regular gasoline pump prices. for several years. with and without tax. is presented in Figure 14. This shows that. Canadian pump prices have been roughly equal to. On an ex-tax basis. This difference accounts for most.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs.

From this it can be seen that Canadian and US rack prices. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. This is no longer the case however. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . which is reflected in US average pump prices. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. Canadian ex-tax pump prices were historically somewhat higher than in the US. This would be a useful area for further research. largely as a result of two factors: • Canadian marketing margins have decreased in this period.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. when compared on an ex-tax basis. RFG has not been introduced to Canadian markets. have improved considerably. behave in a very similar fashion. both a cause and an effect of improved throughputs and ancillary revenues as previously described. Figure 15 compares these values for selected Canadian and US centres over a period of several years. as a result of outlet closures (see Figure 5. page 24) and somewhat increased demand. Canadian outlet throughputs (although likely still less than those of the US). While these trends have also occurred in the US. and moving up or down more or less in unison. trading at any given time within a relatively narrow (about 2 cents per litre) range. • Although this study shows that on an ex-tax basis. Prior to 1994.

500. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense).000 1. conditions begin to favour a “seller’s market”.900. and prices tend to fall. rising and falling closely in step with demand. Gasoline price exhibits a similar.000 1. the price tends to be bid upwards.500. as demand ebbs and inventory improves. and as would be expected in any commodities market under these conditions.000 24¢ 1.000 2. Figure 16: Monthly Demand vs.300. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”.100. albeit less distinct pattern. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 . compared to average ex-tax regular gasoline pump price for the same period.900. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America. a “buyers market” develops. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets. and falling in the latter half of each year. Pump Price (nominal ¢/litre) 3. of motor gasolines from 1991 to 1996. Demand vs.100. Gasoline demand exhibits a very regular seasonal pattern.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg. but in fact across the North American continent (US demand follows a similar pattern).000 34¢ 2. Simply put. As non-refiner marketers attempt to secure a supply of this diminishing inventory.700. increasing significantly every spring.000 2.000 2. or sales. Yet in the latter half of each year.000 2. or indeed anywhere. Price History Figure 16 shows the history of Canadian gasoline demand. not only in a given market.700.

which consists of the refiners and marketers of gasoline and other petroleum products. MJ ERVIN & ASSOCIATES 37 . pump prices have increased due to a significant rise in crude costs in this period). their related product costs and margins. This part of the study presented a number of historical views of retail gasoline prices. All of the findings suggest that. in that prices have fallen. despite a rise in demand. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. and product taxes which add to the consumer price of gasoline. a feature of most marketregulated commerce. while world crude prices and Canadian taxes have generally increased over the past several years. demand rose approximately 8.3%. On a long-term basis however. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. while average ex-tax pump price declined by 14% (since 1994. Figure 16 shows that from 1991 to 1995.Whether in the spring or the fall. competing to meet their own needs. which ensures a competitive product price for buyer and seller alike. the essence of a free market economy. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. The traditional supply-demand model predicts that when demand rises. has operated in a highly competitive environment. gasoline prices have not followed the traditional model. so do prices. This is of course. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. the downstream petroleum industry. as evidenced by declining industry margins. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels.

which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. outlet volumes. ancillary revenues. MJ ERVIN & ASSOCIATES 38 . but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. These “outside factors” tend to obscure the more relevant aspect of pump price. play a role in a market’s pump price. there is no regular monitoring of pump prices in smaller centres. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. and a more detailed examination of price. freight. namely product margin. is useful in providing broad overviews of industry price and margin trends.. etc. and in order to provide insights into the range of competitive dynamics that may exist. A number of factors such as taxes. although one was subsequently dropped due to insufficient submitted data.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. Nineteen markets were therefore adopted for the study (Table 3). outlet costs. and pump prices alone provide very little opportunity for “comparability”. • Methodology Selection of Markets A number of markets were selected for the study. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them.

Process Overview As illustrated in part A. price history data not available through public sources. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. retail outlet and brand representation. or “rack to retail” sector. Five companies responded to this request: Imperial Oil. To examine the competitiveness of the marketing. and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500.are influenced not by one.000. and Canadian Tire Petroleum. and Group B markets less than 500. To this end. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences.0001.Each market was classified according to regional affiliation (BC/Prairie. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. 2 Depending upon the outlet mode. MJ ERVIN & ASSOCIATES 39 . but a number of variables. Petro-Canada. retail pump prices . In addition.and consequently competitiveness . the gross marketing 1 Although White Rock is clearly not a major centre by itself. it was essential to obtain data not normally available through existing public sources. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. Suncor Inc. these organizations provided market-level data on freight costs. Shell Canada. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. and for smaller markets. In all.. Furthermore. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. the gross marketing margin must be examined in isolation from those other variables. Ontario.

and the final “rationalized” gross product margin was determined for each market. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. as the “blended” price includes other product grades. From participant company supplied data. 1 Although outlet cost and ancillary revenue data was not available for all markets. Group B (smaller market) and 19-market study averages. a market-by-market profile of outlet income is presented. rack price. in addition to operating cost and ancillary revenue data gathered in the study1.margin is stripped of its freight component. 3. to arrive at “blended” values2. 2 Accordingly. weighted by sales demand. 1995 average values were determined for pump price. The gross product margin thus serves as an interim basis for comparing study markets. tax content. including some smaller centres. For each market. rack price. This allows for an accurate determination of net outlet revenue. Where applicable. and freight. a broad representation of markets was possible. and freight were successively removed from the pump price. Where differences in gross product margin might still exist. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. Finally. Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. Using the derived gross product margins and volumes for each market. The variables of tax content. by product grade. to derive the 1995 average gross product margin for each of the study markets. 2. average outlet annual throughput was determined for each market. these were weighted by volume. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). average pump prices are higher than actual average regular gasoline prices. MJ ERVIN & ASSOCIATES 40 .

including relatively smaller ones such as Sioux Lookout or Gaspé. petroleum revenues. marketing margin. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. objective data exist for both of these values. 7. represent a broad range of markets. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. accurate comparisons are possible. etc. or consolidated net incomes. and supplier profit. and from one brand to another. many wholesale petroleum purchases are made at less than the “posted” rack price. but they are relatively minor. While clear. Unlike retail pump prices however. The derived weighted average values of pump price. and therefore where assumptions were made. This variation is constant across all nineteen markets however. average revenues from ancillary services were added.. perhaps by 1 to 2 cents per litre.. a recognized source of data on world crude oil and petroleum markets and prices. A dollar-per-outlet estimate of these elements was made. In referring to marketing margins. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain. These differentials do vary from one market to another.. these 19 markets represent a combined population base of 8..4. as described on page 10. Wholesale refined product prices used in this study are therefore likely to be overstated. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. and gross product margins are therefore likely to be understated. MJ ERVIN & ASSOCIATES 41 . and accordingly represent a broad spectrum of consumers and marketers. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™.7 million. and outlet operating costs were deducted from total revenue. This value was then applied to the gross product margin to determine average outlet petroleum revenue. product margins. When these margins are applied to outlet throughputs as in step 4 above.to determine average consolidated net revenue per outlet. 6. Bloomberg rack price values were used as the assumed wholesale price. it is important to understand that the use of rack price in this analysis has certain implications. . 5.. also considering that RUL constitutes the majority of product. Also. the effect on the “blended price” is small. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. freight. encompassing a significant portion of the entire Canadian market. grade differentials were based on known differentials of nearby markets. so that on a cents-per-litre basis. From participant company data. Interpretation of Data In some smaller centres. Supplier Overhead costs.

but a variance of only 12. The data also shows that typically. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. The first of these variables to be examined is tax. A 6. accurate. and based on objective. table J for an explanation of how variance is derived.38 cents per litre in ex-tax pump price.8 cent difference in pump price 1 See footnote at Appendix II. The study data suggests that variations in tax rates account for a significant part of pump price differences. Tax Figure 19 shows posted pump prices for the study markets. there is little to suggest why such a high variance exists. MJ ERVIN & ASSOCIATES 42 . Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. broken into tax and extax components. while lower prices tended to prevail in major centres.Rack prices used in this study are nevertheless market-driven. independently gathered data.64 cents per litre in pump price. higher priced markets are associated with smaller population centres. The data shows a statistical pump price variance of over 17 cents per litre within this study group. The 19-market study group exhibited a statistical variance1 of 17. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist.

The data shows that taxation between markets within the same province varies little. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. Montreal).75 cents per litre (Vancouver.between Calgary and Vancouver for example. thus providing a better basis for comparison. as described in part A. 1 Due to pump price differences. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. This eliminates any effect that tax variability may have. namely the upstream industry and refiner sector. accounting for roughly half of the average retail price. when examined on an ex-tax basis. provincial tax rates can vary greatly. it is therefore more useful to use ex-tax pump prices when comparing any two markets. Figure 19: Pump Price . MJ ERVIN & ASSOCIATES 43 . while taxation between provinces is more pronounced . In all study markets. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. taxes were a significant element of pump price. Upstream and Gross Refiner Margins Although the deduction of tax content is useful. but the variance is minimal .tax. was less than three cents. GST content can vary by market. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry.while all markets are subject to the same rate of federal excise tax and GST1. additional elements of the revenue stream must be further isolated.less than one-half cent per litre. or when examining historical price trends.

the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. as this would cause rack buyers to bring product in from the lower-priced region . but ultimately. This is due to the fact that for any market. MJ ERVIN & ASSOCIATES Cents per litre 44 .Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. and therefore are best analyzed separately. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. Freight costs are additional. it should be restated that each of these sectors. Furthermore. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. rack price) and gross marketing margin elements. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. are clearly delineated by market-driven crude. rack and pump prices. and their respective margins. the rack price is set at the rack point (Winnipeg. one region cannot maintain rack prices at a higher level than another. reflecting some differences in refinery crude acquisition costs. reflecting the reality that at the rack level of competition. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. When rack price is deducted from the ex-tax pump price. as is examined below. if a clear understanding is to be achieved. differ little from those of major centres. the rack price is equivalent to the upstream margin plus the refiner’s margin. the validity of analyzing gross marketing margins in isolation might be raised.assuming transport costs did not outweigh the price difference. To address this. in the case of Thompson).

For markets which are also established as rack points. this freight cost is almost negligible. Before using this as an analytical tool however.49 cents per litre (gross product margin). Two of the study markets had freight costs in excess of 3. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. in fact.16 cents per litre (gross marketing margin) to 7. generally smaller markets. one final outside variable must be isolated: that of product freight. and therefore a significant pump price factor.3 cents per litre. remote population centres. it is essentially a “non-core” business. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. the data shows that freight is often a significant part of the gross marketing margin.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. For other. resulting in comparative gross product margins. as low as 0. Figure 21 shows a study market comparison of gross marketing margins. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13. particularly in comparisons of major urban markets to small. it is therefore important to eliminate the freight variable from the gross marketing margin. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply. Although freight operations are often an integral part of many petroleum marketing operations.0 cents per litre. To provide a comparative view of the marketing dynamics within the study group. with their component freight costs. MJ ERVIN & ASSOCIATES 45 .

to the resultant retail gross product margin .17 cents per litre. while Group B markets averaged 7.6 cents) to the variance in their component gross product margins (7.5 cent per litre average relates to regular gasoline in major markets.95 cents per litre.a variance of only 2.5 cent variance in gross product margin is still significant however. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17. In referring to marketing margins.68 cents per litre1. whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres. MJ ERVIN & ASSOCIATES 46 .42 cents per litre.5 cents).5 cents per litre average Gross Product Margin cited in Part B. Group A (larger population) markets averaged 5. petroleum revenues.the gross revenue available to the petroleum marketing sector for its operations. or between any two regions. was the highest of the study group. Bloomberg rack price values were used as the assumed wholesale price. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3. was the lowest. 1995 gross product margin averaged 5.06 cents per litre. as the 3. Gaspé. For all study markets. at 3.6. product margins.68 cents per litre. The study revealed that: • • Retail gross product margins differ very little between major urban markets . or consolidated net incomes.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets. while Toronto. at 14. A 7.22 cents per litre Smaller markets showed a wider variance in gross product margin .

000.000 4. vs.000 litres per year (Sioux Lookout) to over 5. Indeed. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow.1 cents per litre in Toronto. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets. 3.000.000 litres per year (Toronto).000 5. To understand why such a wide range of margins can exist after eliminating all tax and freight variables. it would likely be so unprofitable as to be un-viable. a wide range of variability still exists between markets in the study group . ranging from under 700. A wide range of volume performance is evident.2 cents per litre in Gaspé. once isolating retail gross product margin from all of the “outside” pump price factors. an examination of related outlet throughput volumes is necessary. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 . for example. If these two factors are related to each other as they are in Figure 24.000 Litres 3.000 1.000.000.000.14.000.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that. sold significantly less than 5 million litres of petroleum per year.000 2. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group.000. if any retail gasoline outlet located in the Toronto area for example. Figure 23: Average Annual Throughput per Outlet 6.differences between markets.

000. If all outlets in a given market experience generally low throughputs.000. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5.962 R2 = 0.000 5. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.6634Ln(x) + 76.000. On average however. the Group A market outlets had roughly 50% more throughput than Group B outlets . Ontario.95 cents). With few exceptions.000.42 cents) than smaller (Group B) population centres (7. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet.000. Although MJ ERVIN & ASSOCIATES 48 . and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. compared to 2.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin.that is. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. it follows that higher gross product margins will be the consequence.000. they remain essentially the same regardless of volume changes . and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes.4 million litres annually. all market groups (BC/Prairie.Figure 24: Outlet Volume vs.7 million respectively. while those with high Gross Product Margins tend to have low outlet throughputs.6624 1. not of poor competition. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput.000 3. Regionally. As most outlet operating cost are fixed in nature . Smaller markets perform as competitively as larger centres.000 Volume (litres) 4.000 6.000 2.

Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions. ancillary sales. while operating costs are those costs which are directly incurred in the operation of the retail facility. Figure 25: Outlet / Volume Relationship . this is likely due to the higher incidence of Group B study markets within this region. and supplier MJ ERVIN & ASSOCIATES 49 . These additional factors clearly have an effect on the relative competitiveness of retail markets. as described below.the revenue available for dealer income.000 4. and incur many expenses in the course of their commerce. which for the study group.000. Gross product margin. which.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1. is only a measure of petroleum revenue per litre. and ultimately shows that very little difference in competitiveness exists between any two markets. supplement their incomes with other revenues.000.000. outlet-based view of retail markets. and auto service. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). and must be examined.000. in addition to petroleum sales.000 3. two additional factors are introduced: ancillary revenue and outlet operating costs. and the resultant consolidated net revenue.000 5. competitiveness occurs between retail outlets. averaged $69.000 6.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. Ancillary revenues are those derived from non-petroleum sales sources. however. It represents the residual revenue which is available to the dealer and to the supplier.000. product cost. Figure 26 summarizes total outlet petroleum sales. such as convenience stores. Consolidated Net Revenue per Outlet To create a complete.000. In reality. car wash. supplier overhead costs.716 .000 2. less outlet costs.

Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer. Finding 19: Based on published rack prices. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets. MJ ERVIN & ASSOCIATES 50 .000 $200.000 $250. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets . $60.000) $(200. which reflects his investment in the outlet. as explained below.000) $(150. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue. Table K). Income BC/PR $300.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist. these ancillary operations contributed to a lower product margin and consequently.Group B outlets were not as profitable as these revenue values might suggest. In effect.000) $(300.000) $(250.000 per year respectively .profits. Figure 26: Outlet Revenues.000 vs.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.000 $150.$154. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations.000 $100. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier. causing the weighted average for Quebec / Atlantic to be depressed).000) $(100. Most markets showed relatively similar net revenues (see Appendix II. reduced pump prices. An examination of these component elements reveals a significant finding: that for most markets. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied.000) $(350. Costs. A discussion of the ultimate distribution of this revenue is useful. As described above. and his personal labour investment.000 $50.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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Influence of other markets: Although relatively close to the US border.658.745 18 446 2. Vancouver collects a 4 cent per litre municipal tax. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs. Geographic / Supply / Freight cost considerations: As a port city. This may explain the somewhat elevated gross product margin in this market. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. a 60.Vancouver population # of brands # of outlets outlets per 10.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . while average throughput ranked 4th.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market. Figure 28: Vancouver . and also has local refining capacity. Low consolidated net revenues may have contributed to the higher margin. this market has access to numerous refiners along the Pacific coast through marine supply.98 ¢ 0. net outlet revenues were less than those of other major centres. contributing to a higher than average pump price.38 ¢ 7. and with access to wholesale product by several means.542. ranking 11th.968 litres 7. Vancouver provides several perspectives into retail marketing. Vancouver is also a terminal for a refined products pipeline from Edmonton.000 barrel per day plant located in the greater Vancouver area.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets. The somewhat high margin placed this market slightly above.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 .ex tax Canada Average . as described below. Overall. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average.000 1. but well within a cluster of markets with similar throughputs.

the study data found little to suggest a material effect upon representation.White Rock population # of brands # of outlets outlets per 10. prices. Freight costs were accordingly low compared to other small markets in this study. White Rock is essentially part of a major market due to its proximity to Vancouver. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver. adjacent to the United States border.98 ¢ 0.45 ¢ 7. at least in this market. Vancouver. gasoline “cross-border shopping” is less pronounced than might be expected. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip. Like Vancouver. thus providing some unique characteristics for the market study. Average outlet throughputs were relatively high. Despite its relatively small size. but less than most markets with a small population base. In all respects. This suggests that. Geographic / Supply / Freight cost considerations:.000 16.604. Consolidated net revenue: No Ancillary or outlet cost data was available for this market.315 4 8 4. White Rock’s margin was typical of markets with similar outlet throughputs. or competitive dynamics. Influence of other markets: Although this market is a border-crossing community. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. the White Rock retail gasoline market displayed the same attributes as a major urban market. This is likely due to the fact that unlike many smaller markets. this market is subject to a 4 cent per litre municipal tax.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. This market is close to its usual rack point.630 litres 7. and retail gross product margin was less than that of markets with a similar population base. prices in this market have historically mirrored those of Vancouver.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. MJ ERVIN & ASSOCIATES 55 . due to its proximity to one. Price history / Taxation: Although no specific data is available.

Other considerations: Of the markets studied.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 . creating some competitive pressures (see Nanton).675 27 313 4.ex tax Canada Average .827. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price. Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market.24 ¢ 6.Calgary population # of brands # of outlets outlets per 10. Influence of other markets: Calgary is fairly remote from US and other major markets.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada. Product is usually sourced from Edmonton refineries via pipeline.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price .4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.719 litres 6. Calgary pump prices are very close to the Canadian average. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics. Rack-to-outlet freight costs are among the lowest in the study group. which was one reason for selecting Calgary as a study market. Some smaller markets in the vicinity have occasionally priced below Calgary. indicative of a strong competitive climate.000 710.47 ¢ 0. Consolidated net revenue: was typical of other major markets in the study group. Calgary is of sufficient size to support a viable rack market. Calgary had the third highest number of retail brands. pump prices in this market have historically been well below the Canadian 10-city average. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. Indeed. Figure 29: Calgary . Price history / Taxation: As the figure below shows.

Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group. Ex-tax prices are also above average. supply/demand is likely more balanced. Influence of other markets: Like Calgary.180 15 86 4. it is likely that this reflected a surplus of wholesale inventory within the local market or region. Since then.794 litres 7.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price . Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity.Regina population # of brands # of outlets outlets per 10.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets. and therefore experiences no particular influences from any other major market. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average. and this market is now more typical of other large population centres. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average. Consolidated net revenue: was typical of other similar markets. Although no supporting data is available. This is partly due to provincial taxation levels.ex tax Canada Average . this market is removed from other significant markets. Figure 30: Regina .50 ¢ 0. Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity. Regina was of some interest as a study market. margins and throughputs were typical of other markets with a similar population base. price volatility has eased. and a history of volatile pump prices.089.000 179.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . Since 1993. and is therefore a recognized rack pricing point.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.21 ¢ 7. which are among the highest in Canada.

this market is removed from other significant markets. this market has exhibited relatively stable pricing. possibly due to modest ancillary revenue.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 . This may reflect a lower than average Consolidated Net Income.000 616. Figure 31: Winnipeg .265.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.ex tax Canada Average .06 ¢ 0.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price . probably related to a regional surplus of wholesale inventory (see Regina). Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs. though somewhat higher than average ex-tax pump prices.22 ¢ 7.Winnipeg population # of brands # of outlets outlets per 10. like most markets of this population density. and therefore experiences no particular influences from any other major market.790 17 261 4.217 litres 8. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market. although. Since then.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. and has remained very close to the Canadian 10-city average. prices have tended to stay somewhat above the Canadian average. it is an established rack price point. Price history / Taxation: In the early 1990’s this market experienced some price war activity. On an ex-tax basis. although there is no study data to support this. Consolidated net revenue: No ancillary or outlet cost data was available for this market. Influence of other markets: Like Calgary.

in terms of expected petroleum revenues. Nanton had a high number of per capita outlets . due to its proximity to one. Average outlet throughputs were relatively low. although not as low as expected. would have an offsetting effect. placing Nanton well below the expected margin.91 ¢ 0. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. more isolated small-town markets. a feature not available to other. as Figure 24 shows. MJ ERVIN & ASSOCIATES 59 . Price history / Taxation: In order to attract market share beyond simply the local population. this market has a relatively low freight overhead. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable. Due to its highway location and its proximity to Calgary. the retail gasoline market in Nanton was not restricted to the local population. Nanton had the second lowest gross product margin of the study group.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Nanton was the smallest market in terms of population.41 ¢ 5. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack.071.far in excess of what would be expected of a community with a population of 1. Influence of other markets:. and perhaps healthy ancillary sales associated with highway traffic. Unlike many of the smaller markets in this study group.000 litres 5.000 1. it is likely that low operating costs. Consolidated net revenue: No Ancillary or cost data was available.600. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market . Alberta population # of brands # of outlets outlets per 10. Despite its small size.Nanton.and a low average outlet throughput. Nanton was perhaps the least viable market in the study group.the highest of the entire group . While these conditions would normally result in a high gross product margin. Nanton appeared to benchmark its pump prices to those of Calgary. while others experience consistently high prices. in order to maintain a share of the considerable potential sales revenue that passes through this market. situated on a major North-South highway to the United States Among the study group.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary.585 4 5 31. In this respect. Nanton has traditionally priced either at or below Calgary. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. the Nanton retail gasoline market displayed the same price attributes as a major urban market.

and was accordingly chosen as a study market. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high.157. the community of Peace River is subjected to a number of factors which give rise to higher than average prices. Peace River has among the highest freight cost in the study group. Geographic / Supply / Freight cost considerations: At 1. other markets. further adding to overall high pump prices. Consolidated net revenue: No Ancillary or outlet cost data was available for this market.6 cents per litre.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. they were comparable to other markets with similar average throughputs. high pump prices. this market has little or no influence upon.6 ¢ 10. Supply is via tanker truck from Edmonton. and due to its isolated locale in northern Alberta. its normal rack point.623 litres 12. experiencing relatively high gross product margin and consequently. isolated markets. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. isolated markets. MJ ERVIN & ASSOCIATES 60 .Peace River.000 6. Peace River also experiences high freight costs.45 ¢ 1. Alberta population # of brands # of outlets outlets per 10.715 6 8 11. and in fact fell into a tight cluster of four other study markets.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. In contrast to Nanton. Price history / Taxation: Peace River is typical of small. though fairly typical of many smaller. nor is it influenced by.

Although ancillary revenues were the smallest of the study group. These factors resulted in relatively strong per-outlet net revenues. Thompson is among the highest freight costs in the study group. MJ ERVIN & ASSOCIATES 61 . thereby creating the potential for narrower margins. Supply is via tanker truck from Winnipeg. a significant portion of which would likely be distributed towards supplier overhead costs.1 ¢ 3.000 14. other markets. its usual rack point.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. further adding to overall high pump prices. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. Manitoba population # of brands # of outlets outlets per 10. It also experienced high freight costs.014. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. Geographic / Supply / Freight cost considerations: At 3.Thompson. isolated markets.02 cents per litre. Consolidated net revenue: Low outlet throughputs were offset by higher margins. outlet costs were also modest typical of most smaller markets. they were comparable to other markets with similar average throughputs. Price history / Taxation: Thompson was typical of small. Other considerations: Like other small markets. and due to its isolated locale in northern Manitoba. high pump prices.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. remote market. nor is it influenced by.02 ¢ 11. and in fact fell into a tight cluster of four other study markets.975 5 6 4. the community of Thompson clearly falls into the category of a small. This however. this market has little or no influence upon. and reduced pump prices.520 litres 14. Although outlets in Thompson appear to be as competitive as those of any other study market. resulting in per-outlet petroleum revenues which were quite typical of many markets. Influence of other markets: Since is not located on a major inter-uban thoroughfare. experiencing relatively high gross product margin and consequently. Thompson is faced with the dilemma. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential.

this market was consistently less than the 10-city average.Toronto population # of brands # of outlets outlets per 10. it had the second highest brand variety of the study group. Influence of other markets: This market is continuously linked with several other major retail markets. stretching from Pickering to Buffalo. Figure 32: Toronto .extax Toronto Posted Price . Consolidated net revenue: Although no study data was available for this market.478 litres 3. thus there exists a climate of robust competition.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average . In addition. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput.06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable.3 ¢ 3. and a resultant low consolidated net revenue.000 2. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity. With an average “blended” gross product margin of only 3. On an ex-tax basis however.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5.06 cents per litre.775 30 546 2. New York. It consequently has a low freight component. least number of outlets per capita. This is likely offset by high operating costs. Within this region are thousands of retail outlets. it is likely that outlet ancillary revenues are among the highest in the country. similar to that of Montreal.36 ¢ 0.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 .275. Margin/Throughput relationship (Figure 24): This market stood apart from the study group. and first in average throughput per outlet. as evidenced by an exceptionally low gross product margin. and is also relatively close to wholesale supply sources in the US. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres. this market ranked first in a number of measures: lowest gross product margin.098.

slightly lower that expected. freight costs within this market were quite low.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets. in fact.29 ¢ 5. exhibiting all of the characteristics of robust competition. Other considerations: While pump prices in this market were somewhat higher than in Toronto. Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin. Figure 33: Ottawa .ex tax Canada Average . Although petroleum revenues were typical of major markets.97 ¢ 0. and close to the Canadian 10-city average. Consolidated net revenue: was low. Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics.145 19 209 3. several smaller.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . Influence of other markets: Although Ottawa is the only major market in the immediate area. ancillary revenue was slightly lower than average.948 litres 5.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price . rural markets co-exist in this area.Ottawa population # of brands # of outlets outlets per 10. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point. some of which have on occasion priced below Ottawa (see Nanton and Calgary).004.000 678. and operating costs were higher than most.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4.

000 81. average throughputs were modest. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point.465. this Canadian market has some difficulty in remaining both competitive and viable.Sault Ste Marie population # of brands # of outlets outlets per 10. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput. and between 5 to 8 cent per litre in gross product margin. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). a consequence of the transport distance from the rack point.475 10 24 2. a product of relatively strong net petroleum revenues combined with lower than average operating costs.22 ¢ 7. partly due to higher freight costs. MJ ERVIN & ASSOCIATES 64 . somewhat isolated.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply. and accordingly. yet with some potential for cross-border retail competition. This would suggest that a significant market share is being lost across the US border.550 litres 8. Sault Ste Marie is a sizable market. Freight costs are therefore high.73 ¢ 1.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Influence of other markets: This market is close to a US border market. Pump prices in this market were thus typical of any market with similar throughput characteristics. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets.

066 litres 14. despite its high prices. although high. with little or no influence from other retail gasoline markets.Sioux Lookout population # of brands # of outlets outlets per 10. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets.006 litres in 1995. was much less than expected for a market of this size. largely due to higher freight costs. one-seventh the average throughput in Toronto. and outlet throughputs of any market studied. this market experiences a high degree of price competition. MJ ERVIN & ASSOCIATES 65 . so that virtually all sales volume represents local demand only. It therefore presents some unique characteristics for the market study.310 3 3 9. Influence of other markets: This is clearly an isolated market.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. Freight costs are therefore high. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. Sioux Lookout is well-removed from any major highway. This would suggest that. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. in fact the second highest in the study group. Consolidated net revenue: No data was available for this market. and had the least number of outlets.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group. An average outlet in Sioux Lookout pumped only 694. This is a major factor in the high cost of gasoline in this market.000 3. brands.2 ¢ 11.96 ¢ 3.

Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. this market interacts with several other markets in the region. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 . pump prices in this market have a tendency to be volatile. and is also relatively close to wholesale supply sources in the US. Price history / Taxation: As the figure shows.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average .394. with resultant low average outlet throughputs. combined with low petroleum revenues and high operating costs.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. With 32 competing brands. pump prices in Montreal have generally been at or below the 10-city average for major markets. It therefore represents a highly competitive rack market.extax Montreal Posted Price .Montreal population # of brands # of outlets outlets per 10.43 ¢ 0. placed Montreal lowest of all study markets in terms of consolidated net revenue. Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets. On an ex-tax basis however. Montreal was included in the selected market study. This.000 1.5 cents per litre was introduced into the Montreal area). this market ranks first of the study group in terms of brand variety.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region. This market had the highest tax content of the study group due to high provincial tax rates (in 1996. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity. an additional tax of 1. Figure 34: Montreal .144 litres 5. a function of a competitive rack market and an excess of retail outlets competing for market share.870 32 866 4.775. Influence of other markets: Like Toronto. thus promoting a competitive climate.3 ¢ 5.

Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. by tank truck. yet is geographically quite isolated.605 14 97 8. Chicoutimi is normally supplied from the Quebec city rack. Margin/Throughput relationship (Figure 24): Outlet throughputs. Nevertheless. both pump and ex-tax prices in this market were higher than average. although low. Consolidated net revenue: was average among the study group.08 ¢ 11.28 ¢ 1. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Gross product margin was accordingly high. but as the figure shows. MJ ERVIN & ASSOCIATES 67 . this market has little potential as a rack market. for example).Chicoutimi population # of brands # of outlets outlets per 10. In the case of Chicoutimi. but is quite isolated from any other markets.000 120.289 litres 12. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John. were quite typical of markets with similar populations. a partial factor in the high cost of gasoline in this market. Freight costs are therefore somewhat high. this amounted to a reduction of 5.75 cents per litre. within a cluster of other markets with similar attributes.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base.250.

amounting to a reduction of 5. with little or no influence from other retail gasoline markets.000 16.33 ¢ 14.50 ¢ 3. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack.17 gross product margin the highest of the study group. a key factor contributing to its 14. Gaspé is well-removed from any major highway.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. MJ ERVIN & ASSOCIATES 68 .400 6 13 4.75 cents per litre. in fact the highest in the study group. located at a considerable distance from its rack source of supply.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.900 litres 17. by tank truck. both pump and extax prices in this market were higher than average. a product of high freight costs and gross product margins. in the case. ancillary revenues would likely be modest. Freight costs are therefore high. This is a major factor in the high cost of gasoline in this market. Nevertheless. Although operating costs are likely to be low in a small market like Gaspé. Influence of other markets: This is clearly an isolated market. Nevertheless. so that virtually all sales volume represents local demand only.Gaspé population # of brands # of outlets outlets per 10. this margin was only slightly higher than expected for a market with these throughput attributes. Consolidated net revenue: No data was available for this market.

retail pump prices are ultimately a reflection of rack prices.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals. do not differ markedly from any other rack point in the study group. Since provincial taxes are among the lowest in the country. with or without a local refinery.79 ¢ 0. That a major refinery resides in this market might suggest that these prices should be among the least in the country. ex-tax prices were relatively high.000 74. and is capable of shipping and receiving wholesale product through marine facilities. resulting in lower than expected average outlet throughputs. Accordingly. In fact. reflected in the high ex-tax pump price. this market fell within the expected range of gross product margins as a function of outlet throughput. which for Saint John.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.ex tax Canada Average .095.extax MJ ERVIN & ASSOCIATES 69 . Nevertheless. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price . The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor.970 9 56 7. Figure 35: Saint John NB .694 litres 9. Consolidated net revenue: was average for the study group. the Saint John retail market is relatively isolated from other retail markets of any significance. freight costs in this market are low.27 ¢ 9. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner. Price history / Taxation: Historically. and therefore. it is an established rack point. Saint John presents some unique characteristics for the market study. posted pump prices in the Saint John market have closely followed the 10-city average. Average gross product margin was consequently high.Saint John NB population # of brands # of outlets outlets per 10.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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residuals for outlets not studied may be better.......... 33 Finding 13: From 1991 to 1996. 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences................... 50 Finding 20: For the 481 individual outlets studied.............. and likely a negative impact on consumers...................... 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels.. In effect......... while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre.......................... are principally a reflection of changes in the underlying price of crude oil............. The viability of the Canadian retail gasoline sector as a whole may be somewhat better.......... ... petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied.. after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements..... 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs................ 48 Finding 19: Based on published rack prices........................ ........... 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences....... 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness...........51 Finding 21: Based on published rack prices and the individual outlet data........ the residual represented a net loss to the supplier...... 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.............. ............ which in turn. when compared on an ex-tax basis............................................ ... 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US.......... which ensures a competitive product price for buyer and seller alike......... Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads............................... a feature of most market-regulated commerce.................... while those with high Gross Product Margins tend to have low outlet throughputs...... reduced pump prices.............................................. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations....................................... given the possibility of discounts from posted rack prices and potentially lower overhead costs......... remote population centres.............................. ...........Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products............................... these ancillary operations contributed to a lower product margin and consequently.................... ... the profitability of the 481 outlets studied appears only marginal...................... particularly in comparisons of major urban markets to small................... the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre................................ 71 MJ ERVIN & ASSOCIATES 73 ..................................

In comparing several diverse markets. The Canadian retail petroleum products industry. 2. by all objective measures available to this study. Rack and pump prices are determined in competitive marketplaces. On a national level. was shown to be strongly competitive: • A long-term decline in pump prices. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . 1. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. Canadian prices have been at or below US prices in recent years. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. in comparing Canada average (city) pump prices to those of the United States. was observed (Finding 10).Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. The resultant margins. is mistaken. each with unique dynamics. when taxes were excluded (Finding 14). The study presents such a model. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). the very margins within which this industry operates has. when measured in constant and nominal dollars. a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. Although an objective measure of competitiveness is elusive. and promotions are the other three). As described in this study however. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. exhibited a diminishing trend (Finding 13). a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. over the long term. price is but one of four competitiveness “tools” available to marketers (product. place. Virtually all of the competitiveness indicators examined in this study relate to price. This has not simply been a result of a decline in underlying raw materials costs.

the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). measured against the average outlet throughput for that market. presents a competitive disadvantage to Canadian marketers. rack price and freight cost. By contrast. demand and other competitive factors existing at the time. experienced higher than average pump prices. This would entail the tracking of not only pump price. but also rack prices and outlet performance. vary considerably from one population centre to another. well over half of all outlets in Canada operate as lessees or independents. municipal levels of government. but given its magnitude. and in some markets. and in some markets. when the “outside” factors (tax. refiner margins accounted for 5. and accordingly. taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. In applying such a model to the retail petroleum marketing industry. are thus a reflection of the state of product supply. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. taxation differences between Canadian and US markets.3 cents or 9 percent (Finding 5). or 6 percent (Finding 6) of the 1996 average regular pump price. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. particularly smaller ones. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. it is important to understand that. for example) were rationalized.5 cents. and are a predominant cause of inter-regional pump price differences (Finding 16). Taxation is a significant factor in the price of retail gasoline. While some markets.even negative values. 3. these markets have managed to sustain a certain level of viability and competitiveness. generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets. since this is the effective range of consumer choice. Petroleum product taxes are levied at the federal. an exercise that consumers are unlikely to engage in. The latter two can vary considerably from one market to another. but even in such cases. MJ ERVIN & ASSOCIATES 75 . or even between Canadian markets with differing tax structures. This implies that the competitive dynamics pertaining to these retail markets can. retail petroleum markets are considered local (municipal) in scope. and do. crude costs accounted for roughly 34 percent (Finding 2). This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. and product margins accounted for 3. Dealers were shown to have a variety of relationships with their supplier. provincial.

Viewed from this perspective. This margin represents gross revenue (after wholesale product and freight cost) which. the Canadian retail marketing sector realized an average gross margin of 3. MJ ERVIN & ASSOCIATES 76 . dealer income. Retail pump prices showed a corresponding seasonal pattern. This consolidated outlet revenue. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. second only to the United States. is available to provide for all retail marketing operations including outlet costs. the absence of price war activity does not imply a lack of competitiveness. which in turn. which in turn is the principal driver of ex-tax pump prices. showed a close relationship to underlying crude prices (Finding 11). fluctuating prices are a strong competitiveness indicator (Finding 7). constitute a small portion of the retail pump price. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. Retail pump price changes showed a close relationship to underlying rack prices. While price wars are undoubtedly an indicator of competitiveness. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). 5. Rack prices were shown to not significantly differ between major centres. incorporated with ancillary revenues and outlet costs. supplier costs and profitability. in a highly distinct. In fact. Pump price fluctuations can be an indicator of competition in the marketplace. when examined on the margin-volume model. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). and a loss in the case of urban markets. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. a price-stable market. Sioux Lookout. on a per litre basis. predictable seasonal pattern. Retail gasoline marketing revenues. The pump price/margin model shows that in 1996.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. reflecting consumer demand behavior (Finding 15). Demand for gasoline was shown to vary significantly according to the time of year. when distributed these three ways (Finding 20). which represent the majority of Canada’s population base. 4. and more price-stable markets such as Sioux Lookout. on the basis of price fluctuation alone. exhibited competitive traits typical of any of the study markets.

Nevertheless. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. Thus. based upon an assumed posted rack price. Since 1991. intense competitive pressures in the downstream industry in general. Also. despite increases in tax content and crude costs (Finding 12). most outlets used in the 19-market study represent major integrated oil companies. and have resulted from. not price. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. Industry profitability is extremely sensitive to very small changes in pump price.6. serve as perhaps the most significant indicators of competitiveness in the downstream industry. not excessive profits. this industry sector would have realized profits of unprecedented proportions. Declining refiner and marketing margins. and the marketing sector in particular. if Canadian average pump prices were only one cent higher than they were in 1995. crude costs. but to increases in underlying rack prices. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. and has been a result of. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. and in turn. Both the downward trend in margins. assuming all other costs were unchanged. these findings clearly show that pump price increases are ultimately linked not to increased profits. several competitive strategies. Also. in the long term these fluctuations are likely more reflective of market restorations. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. This trend has both resulted in. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). despite the predisposition of many observers to use them as such. Indeed. both of which are beyond the direct influence of Canada’s oil companies. MJ ERVIN & ASSOCIATES 77 . While these economics might appear to place this industry in a position of poor viability. Thus. including: • • • improving production efficiency through refinery plant rationalizations (closures). have caused. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. 7. and the associated industry initiatives which are ongoing in nature. although pump prices in some markets can fluctuate by several cents per litre in the course of a week.

although this study provides comprehensive evidence of this. When these margins were compared to their corresponding outlet throughputs. 9. and this study showed that gasoline prices were no exception. had petroleum margins which were commensurate with average outlet throughput for that market. virtually all of the 19 study markets exhibited similar levels of competition. isolated markets face particular challenges: although found to be highly competitive. reducing the number of outlets may also reduce the number of competitors. When plotted against the margin-volume model. average pump prices were relatively high. the solution would be to encourage some dealers to exit the market. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). more isolated markets are generally higher than in larger centres. The costs of most consumer goods in smaller. reduce pump prices. regardless of size. which should. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. This created some economic pressure to sell product at a higher pump price. While competitiveness in most smaller markets was shown to be as active as in larger centres. which could actually inhibit competition. according to the margin-volume model. there are three points to consider: • In very small markets. Thus. Although some smaller markets appeared to have higher gross product margins than larger markets. Outlet throughput is a key determinant of inter-market pump price differences. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. it would seem that if local government in smaller markets were interested in lowering pump prices. Smaller. MJ ERVIN & ASSOCIATES 78 . Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18).8. A wide range of petroleum gross product margins were evident within the 19market study group. poor outlet throughputs were generally the predominant factor. In suggesting this approach however. • • At first glance. other factors exist which contribute to relatively high margins and prices. thereby improving petroleum volumes and ancillary revenues at the remaining sites. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. That such a relationship should exist was not surprising.5 million fewer litres of gasoline than a group A (major centre) station. most markets.

A full analysis of the various features of the Nova Scotia and PEI regulatory structures. the degree of price competition in the retail petroleum has in effect. The loss of employment represented by a station closure may be of some concern to smaller communities. many national and local environmental regulations exist for good cause. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. MJ ERVIN & ASSOCIATES 79 . This competition then. is both the cause and consequence of increased activity in ancillary operations. Retail ancillary operations are a critical element of petroleum price competition. and in turn. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. The federal Competition Bureau for example. has seen a decline in pump prices relative to other Canadian markets. in order to build upon the findings in this study towards a full understanding of the dynamics at work. as marketers find even more innovative ways to attract market share. under the current PEI regulatory structure. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. and as such. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. and likely others in Nova Scotia. will likely preserve a highly competitive petroleum market. Convenience store. Also. does not appear to benefit in consumer terms. 11. Charlottetown. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). are an acceptable limitation on pure competition (Finding 8). is viewed as an agency which exists to the benefit of industry and consumer alike.• A full-serve retail gasoline outlet typically employs 3-5 staff. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. characterized by narrow product margins and relatively flat pump prices. car wash. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). depressed petroleum revenues below that of outlet operating costs. The historical record is clear however: since deregulating pump prices. the Halifax market. and the traditional automotive service bay. As these findings show. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. 10. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. is well beyond the scope of this study. and the perceived effect on their markets.

and the converse image held in much of the public domain. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. in a simple format designed for consumers and legislators.This study proposes rather. 1. not inhibit. that where a healthy competitive climate exists. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. margins and competitiveness factors. direct regulatory interventions may have an adverse effect on competitiveness. petroleum marketing competitiveness. Public perception measurement. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. A regular comprehensive competitiveness evaluation. Develop cooperative industry research into marketing sector competitiveness issues. as it does in the Canadian petroleum marketing sector. Improve public understanding and awareness of competition in the petroleum marketing sector. This should be in the form of a quarterly summary of price trends and related measurements. and the nature of competitiveness influences. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. 2. possibly to the detriment of the consumer. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research.

is vital if Canadians are to put in place the structures that truly meet their social and economic needs. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. using Canadian and foreign selected markets. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. by industry. and regulators alike. using Canadian and foreign selected markets. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. consumers. MJ ERVIN & ASSOCIATES 81 . and in particular. using Canadian and foreign selected markets. • • • • * * * Better understanding of this industry. along the lines of the model used in this study. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. and issues/opportunities facing such markets. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor.

Appendices MJ ERVIN & ASSOCIATES 82 .

the retail price of gasoline that would be displayed if all product taxes were removed. diesel. such as convenience goods. in cents per litre. provincial pump tax. and included in the retail pump price. etc. such as a major oil company or regional refiner/marketer. such as a retail gasoline outlet.an organization who sells refined petroleum products to end-use consumers. Margin . Dealer .I Glossary of Terms Ancillary service ..a petroleum marketer who is not involved in the refining of petroleum products.a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. Usually expressed on a per-unit basis. car wash. and in some regions. GST. and therefore purchases its supply of petroleum product from an outside source. MJ ERVIN & ASSOCIATES 83 .the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline.(for the purpose of this study) the cost. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. Independent Petroleum Marketer . service bays.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces. of transporting petroleum product from the rack point to the final point of sale.Canadian Petroleum Products Institute. an association of petroleum refiners and marketers. Downstream . which serves as the voice of the petroleum products industry in Canada on environment. Integrated Oil Company . generally expressed in cents per litre. Grade Differential . independent dealers. Lessee .a generic term referring to a retail outlet operator. lubricants. There are several modes (see below) of dealer operation. These product taxes include Excise tax. Distribution Costs . the regular unleaded pump price. health. The ex-tax pump price is exclusive of these taxes. Ex-tax Pump Price ..the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived. safety and business issues.a service provided in addition to the basic retail petroleum sales operation. Major Oil Company . but inclusive of any corporate taxes on earnings.the difference in pump price between a premium or mid-grade of gasoline vs. currently established at 10¢ per litre. such as lessees. Excise Tax . Marketer . municipal tax levees. CPPI . and commission dealers. for example.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers. etc.a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier.

Regional Refiner/Marketer . Upstream . and independent dealer. usually per month or per year. Supplier . with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. an association of upstream and downstream oil companies and related organizations. Although in theory the transfer price could be set at any arbitrary value.an organization who. MJ ERVIN & ASSOCIATES 84 . Transfer Price . lessee. is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces.the volume (ie: in litres) of petroleum sold at a retail outlet in a given period. the supplier has initial title to the petroleum product as it leaves the rack point. In the retail gasoline sector. it is usually based on the market-driven rack price.the segment of the oil industry involved in the exploration and/or production of crude oil. these can be broadly classified as company operated. manufactures (from crude oil) a range of petroleum products suitable for consumer use. or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. This may be at a refinery loading terminal. the raw material from which petroleum products are manufactured.the wholesale price posted at the rack point.the point at which title to refined product is transferred from the refiner to the supplier.Mode . PCF .the type of contractual relationship between the supplier and the dealer (outlet operator). Refiner .the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. Rack Price .within the context of retail gasoline marketing.Petroleum Communication Foundation. Throughput . Rack Point . commission dealer.

9 155.0 115.4 34.8 106.4 124. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.2 30.3 115.0 1991 126.2 50.1 151.4 53.9 122.2 20.5 111.6 122.8 130.1 104.7 54.7 95.3 27.7 123.6 51.9 1994 130.3 119.1 103.1 120.3 132.5 94.4 104.7 124.2 31.8 47.1 120.4 122.7 22.2 127.4 152.2 121.0 111. 62-010: Consumer Prices and Price Indexes.0 42.2 109.5 115.4 110.2 45.0 97.7 30.2 49.1 104.0 93.5 25.0 19.1 117.9 115.6 136.6 91.8 108.9 1993 130.6 92.2 142.0 93.5 49.5 120.8 132.3 151. Nominal (¢/litre) (2) RUL Ex-tax Price.8 135.7 96.1 146.9 108.4 136.2 133.1 87.4 120.7 118.1 144. Nominal (¢/litre) (2) RUL Annual Price.5 112.1 48.3 122.0 30.1 1990 119.7 122.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.5 126.2 39.5 30.4 97.1 26.0 102.1 105.0 135.3 1992 128.5 100.3 40.8 94.8 95.4 45.3 139. using a weighted (by provincial gasoline demand) 10 city average.9 26.3 55.9 118.1 40.3 1989 114.5 124.2 112.2 92.3 125.9 1995 133. MJ ERVIN & ASSOCIATES 85 .8 1987 104.9 97. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.4 104.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.1 115.4 29.6 107.4 27.3 134.0 104. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.9 26.5 145.1 97.1 167.1 117.0 32.3 160.2 99.3 52.4 134.8 28.7 29.8 93.0 1988 108. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.6 133.3 141.3 58.2 45.3 19.3 96. No.4 57.7 132.1 126.8 104.

1 18.0 24.3 54.5 25.0 16.8 9.8 25.0 12.8 22.6 21.3 12.2 26.9 7.6 23.4 13.4 26.8 15.2 13.2 15.0 10.9 6.7 23.8 55.8 33.8 30.1 16.9 7.9 25.4 31.7 18.3 26.4 14.2 22.Table B: Key Price / Margin History .1 17.6 25.4 15.1 53.3 15.9 31.7 14.6 54.0 24.9 22.2 63.6 6.4 MJ ERVIN & ASSOCIATES 86 .5 11.5 10.1 13.1 7.7 4.2 26.2 23.7 19.7 29.2 7.3 13.8 53.3 17.9 25.9 6.1 29.0 25.0 24.5 33.2 11.2 27.3 13.2 13.5 23.7 7.1 23.6 20.9 14.3 13.4 34.4 32.4 26.0 28.7 4.1 16.9 23.8 14.8 14.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.9 9.7 19.0 24.5 32.7 29.1 23.8 8.7 7.1 53.8 14.0 54.4 14.5 14.5 8.5 26.0 4.2 13.9 23.0 7.9 14.3 6.2 5.1 7.7 28.5 6.6 26.7 29.1 13.8 16.7 63.0 15.2 16.2 7.8 26.5 5.6 13.9 8.9 25.0 52.7 18.7 14.7 14.9 4.7 14.0 9.1 9.1 52.8 28.0 24.8 21.6 54.0 33.4 57.2 21.4 33.7 7.3 22.1 13.5 10.9 25.1 16.2 14.9 13.8 29.5 26.9 58.4 55.3 4.3 15.3 9.9 4.7 14.5 22.1 18.5 28.7 58.5 7.3 5.1 25.9 25.6 5.9 56.9 56.8 8.2 65.7 39.0 7.6 54.6 23.4 7.0 5.4 8.0 55.7 Downstream Margin 14.8 23.6 7.2 6.0 14.4 53.7 31.7 6.6 13.6 25.0 16.1 24.5 31.3 13.2 12.8 14.6 8.1 21.3 24.3 23.2 7.0 22.7 34.8 23.5 19.1 19.3 58.8 13.1 16.9 26.5 7.5 23.0 16.3 13.3 66.0 8.5 Gross Marketing Margin Gross Refiner Margin 53.3 56.3 Tax Content 23.2 56.9 6.2 23.2 25.4 9.4 20.7 13.4 21.2 7.5 16.8 21.4 29.6 26.3 54.9 30.9 11.4 58.2 6.7 15.2 14.4 31.6 9.4 13.0 7.3 56.6 18.4 24.9 24.2 4.8 26.8 24.9 17.3 25.5 15.7 33.0 13.1 23.2 41.2 25.5 35.6 28.9 53.4 22.4 14.9 26.8 55.0 26.0 20.0 26.2 16.1 5.1 22.5 27.9 15.3 22.9 23.4 26.3 26.2 29.6 24.4 24.3 57.5 30.3 6.5 23.0 25.9 54.0 24.2 27.9 55.4 14.3 42.0 24.7 32.5 14.7 24.2 13.8 57.4 56.7 12.3 14.1 22.8 11.2 8.8 53.9 53.5 27.9 12.6 4.0 26.7 8.4 12.7 25.4 30.6 52.7 4.2 27.0 16.9 21.5 56.3 54.9 55.9 7.2 24.6 26.5 54.5 57.1 39.

5 6.0 28.0 6.2 12.4 6.3 26.3 9.1 Gross Refiner Margin 7.0 27.8 29.4 26.1 14.7 5.0 11.9 58.9 49.2 14.0 6.3 26.7 29.5 19.3 4.1 51.7 6.4 15.3 53.1 26.3 6.1 3.3 13.2 26.4 24.7 26.8 4.5 7.2 7.1 24.1 14.0 14.9 19.4 21.2 Gross Marketing Margin 4.6 4.5 54.9 6.4 4.0 6.9 27.1 26.5 23.3 21.6 5.9 4.6 53.2 5.1 21.9 49.6 11.7 16.7 23.2 25.7 13.0 26.1 26.6 3.1 15.8 20.2 7.0 28.2 25.8 22.3 26.5 19.0 9.0 14.6 10.7 53.5 2.3 54.5 6.3 4.3 8.3 21.6 19.5 11.7 51.9 28.5 25.0 26.9 14.1 6.5 55.9 27.3 55.6 9.8 28.8 17.6 27.4 26.7 3.1 54.5 4.1 11.2 9.1 55.4 16.2 20.2 14.7 3.9 26.2 49.5 3.7 5.5 9.3 26.4 11.1 11.9 29.5 21.0 52.3 26.9 3.1 15.3 28.5 20.2 11.3 7.8 23.4 6.3 7.9 9.0 24.3 12.2 26.9 12.6 15.8 49.6 53.7 53.8 52.7 14.6 17.5 15.2 27.0 28.6 4.4 32.4 21.1 6.5 21.9 14.1 61.8 27.8 6.3 28.9 11.3 26.7 52.5 7.2 26.1 11.3 9.1 15.7 25.0 5.2 4.0 12.1 Tax Content 26.6 20.2 7.9 17.0 29.7 24.6 21.1 6.5 11.9 23.6 15.9 4.0 54.4 25.2 20.3 23.4 6.7 13.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .7 24.7 7.8 50.0 28.2 28.7 7.4 7.3 58.6 23.8 23.4 6.7 6.7 53.3 27.2 4.4 25.4 26.0 57.1 57.7 8.7 25.7 26.5 13.5 3.4 5.8 10.0 9.1 6.5 5.3 26.6 16.3 9.5 13.2 7.0 12.6 10.0 25.3 26.1 16.2 54.9 29.6 20.6 12.1 51.8 25.9 5.4 26.7 18.5 5.3 4.9 Downstream Margin 12.5 28.4 13.7 12.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.7 14.2 14.2 15.4 51.5 14.1 20.8 28.5 6.0 53.5 21.0 28.0 25.2 23.1 10.1 14.5 53.9 12.0 5.5 17.1 11.3 25.3 26.4 28.7 15.

369.9 29.516.9 22.636.613 3.4 21.7 26.176 3.661 Canada Avg ex tax RUL pump price (¢/l) 39.324 2.5 27.270 3.930 3.479 2.967 2.073 2.564 2.193 3.8 29.671.5 19.232 3.637 3.403 2.Table C: Canadian Supply.878 2.808.580 3.083.287 2.969 2.3 22.677 3.886 3.122.1 29.716.256 2.771 3.521 2.315 2.661 Canadian Domestic Gasoline Sales (M3) 2.589 3.976.733 2.636.853 2.056 3.7 29.744.9 26.720 3.801.4 24.152 2.672.370 2.890.654.300.3 23.893.331 2.346.254.887.047 3.070 3.7 31.703 2.748.498.934.620 3.412 2.044 2.141.437.966.4 24.047 2.191 2.798.9 26.450 2. Demand.735.151.642.865.938.604 2.2 23.6 24.176 2.979 2.782 3.775.933 3.202.2 29.666.839 2.361.4 21.612 3.5 28.218.725.141 3.600.095 2.799.626.027 2.3 23.625 2.9 21.874 3.9 19.1 23.2 23.5 30.2 24.140.822.841 2.1 22.020 2.3 Canada Avg RUL Rack Price (¢/l) 35.998.262.301 2.051 3.7 34.287.1 23.958.379.897.859 2.622.475 2.970.544 3.281 2.389.369 2.322 2.651 2.844.509 3.609.409.900.952.477.501.142.322 2.5 31.941 2.160 3.765 3.480.935 3.354.011 2.9 23.373.030.113.7 18.287 2.904.796.767.377.378.853.804 3.8 30.960.429 2.873.667 2.281.180 2.181.235 3.201.688.2 22.871 2.889 3.1 23.729.883.641.979 3.268 2.837.301.182 3.995.773.510 3.592 2.931 3.429 2.114 3.709 2.880 Canadian Retail Gasoline Sales (M3) 2.045 2.097 2.693 3.565.7 29.5 22.326.366 2.321.416 2.5 27.311 3.897 2.035 2.025.335 2.830.7 28.263.647.218 3.455.322 3.411.473.8 21.415 2.015 3.120.8 23.102.4 25.644 3.456 2.0 20.0 28.732.781.283.714.709 2.2 21.827 3.298 2.5 32.748 2.785.037 2.295.739.9 23.646 2.3 24.180.973.823.673 2.684 2.4 22.864 2.269 2.457 2.427.801.2 27.202 3.220.532.206.9 17.245.8 28.5 25.813 2.802 2.101 2.422.9 23.291.019.743 2.333.329 3.932 2.7 29.2 27.255 3.250.029 2.485 2.558.615 2.840.8 MJ ERVIN & ASSOCIATES 88 .441.518.279 2.628 3.381 2.026 2.045 2.299 2.246 2.508.2 20.297 2.188 3.081.461 3.566.2 27.168 2.476.316.682.133 3.804 2.299.779 2.2 26.437.192.112 2.242 2.630.4 32.294.897 3.627 2.003.345.254.313 2.669.818.045.499 2.970 3.558.7 24.490 3.869 2.131.180 3.7 21.1 21.430.4 29.085.599 2.199 2.752 2.687.130 3.0 24.101.9 30. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.439.831.6 21.810.301.443 2.193 3.286.5 23.323 3.621.285 2.970.132.209.469 4.894.164.8 23.633.853 3. Inventory.619 2.251.9 31.2 26.710.8 27.502 2.462.3 26.767.002.6 28.3 22.067.572 2.458.254 2.587.179 3.122 2.633 2.8 26.833 2.130 3.6 26.876.039.7 24.000 3.161.022.095.843.070.884 2.1 16.6 23.075.108.2 27.8 33.338 3.682 3.4 31.089.8 22.930.325 2.968 3.141.

077.386 3.338 2.906.264 2.649.4 20.204.141 2.5 source: Statistics Canada (production.555.112 3.521 2.198.519.601 3.068.324 2.863.336.881.714 2.703 3.264 2.797.0 26.9 22.8 24.997 2.977.195.5 21.376.0 24.415 2.671.648 3.516 3.505 2.889.382.414 3.799 2.184.1 21.315.669 2.005 2.182.6 20.8 21.679.667 Canadian Domestic Gasoline Sales (M3) 3. demand.082.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.0 25.155 2.8 20.539.149.6 20.904.2 25.130 3.7 21.930.593.346 2.8 25.037 3.198 2.825.961.467 2.617 2.649.097.7 Canada Avg RUL Rack Price (¢/l) 20.620.936 3.638 2.294 3.5 25.940 2.785.796.170 3.864 2.8 28.791 3.597 2.9 27.675 2.344 3.614.806.055 2.386 3.970.170 Canadian Retail Gasoline Sales (M3) 2.7 19.830 3.426.965.660 3.4 26.317 2.7 22.222 2.320 3.4 25.919 2.658.261.984 3.871 3.370.717.074.692.644 3.986.250.840 2.5 21.537.198.0 25.0 26.148.469.2 25.928 3.442 2.1 24.999 3.324.2 26.390.773. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .4 26.753 3.214 2.483.179.363.994 3.857.244 3.9 29.006 3.219 Canada Avg ex tax RUL pump price (¢/l) 27.566 3.606.656 3.205 2.123.048.607.480 2.165.

4 56.7 65.2 46.2 65.7 50.5 55.5 58.4 47.6 46.8 56.3 56.6 58.3 48.5 57.9 59.9 56.7 63.4 63.7 53.1 53.9 61.5 59.8 48.8 45.2 63.9 61.9 61.9 51.4 55.5 50.8 48.0 61.0 59.4 61.9 53.0 61.7 65.5 Vancouver 53.5 58.9 52.2 62.7 52.2 48.9 56.5 46.5 57.3 50.7 51.5 57.9 52.9 55.3 49.4 55.5 57.9 62.5 59.4 52.2 59.5 56.9 56.0 57.9 56.3 51.6 53.2 54.6 55.9 58.9 58.8 47.5 55.9 58.7 53.9 44.0 52.8 53.3 49.1 44.4 58.6 53.0 58.7 48.0 61.9 53.9 56.3 42.9 61.5 57.5 56.4 46.5 59.5 59.7 48.5 59.0 46.5 59.7 65.2 55.5 51.2 62.5 60.3 52.9 54.8 47.5 53.2 56.5 60.4 55.6 49.9 52.9 58.4 53.2 51.9 64.4 46.4 52.6 44.7 White Rock Calgary 45.3 59.7 57.3 50.0 54.7 52.7 57.9 51.5 57.3 52.4 48.0 62.5 58.3 54.5 61.4 56.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.5 59.9 64.8 Thompson 59.0 50.4 50.0 44.0 39.6 59.9 53.9 56.5 60.5 57.4 49.5 47.3 52.4 57.9 64.5 57.9 53.1 43.7 45.5 58.9 50.7 54.9 47.8 55.9 55.6 50.9 59.5 47.2 50.9 64.Table D: Pump Price History .6 58.5 58.8 53.5 58.9 61.4 59.4 46.9 53.8 49.6 48.9 49.8 52.5 51.0 Sioux Lookout 62.3 62.5 59.9 57.9 54.8 50.6 47.4 54.9 52.8 52.9 56.5 60.7 53.4 Winnipeg 49.4 56.3 52.2 54.2 51.5 57.9 51.5 51.8 56.4 55.2 62.6 46.9 56.2 62.9 54.9 63.2 Nanton Peace River Regina 49.4 52.9 56.5 54.8 44.8 52.0 48.7 46.2 62.9 47.8 51.8 56.0 55.1 55.7 51.9 53.3 52.9 53.5 56.1 50.0 59.9 54.5 49.4 53.9 52.9 55.5 60.5 60.5 58.5 52.0 61.8 54.6 62.1 49.6 50.4 54.2 62.8 41.8 48.7 44.4 55.8 50.0 61.8 64.2 50.1 59.9 52.8 57.4 55.0 62.5 57.9 56.9 MJ ERVIN & ASSOCIATES 90 .5 61.6 48.3 54.9 48.9 58.2 62.2 58.4 65.5 57.3 55.1 52.4 52.8 59.4 56.5 47.2 50.9 54.5 51.1 44.9 61.8 56.9 53.2 57.5 52.5 45.8 53.9 47.1 50.5 57.5 58.1 49.6 55.5 57.5 54.7 45.3 48.6 48.0 61.9 54.6 54.7 51.1 53.0 62.5 58.5 58.6 51.4 56.9 55.2 54.2 47.4 54.5 59.9 56.4 58.9 57.2 46.9 49.8 52.5 53.0 52.4 56.7 65.1 60.4 57.9 44.9 53.9 45.8 57.9 47.1 55.9 49.7 62.4 53.6 52.1 55.7 54.1 56.6 47.7 50.2 65.2 61.7 65.2 51.4 52.9 46.4 61.3 55.7 49.7 62.5 62.9 64.7 54.9 51.8 56.8 52.2 46.5 58.6 47.9 53.0 61.5 51.1 41.1 49.5 58.5 53.5 56.8 53.9 53.9 52.4 61.2 62.2 43.8 48.5 56.5 45.2 62.6 54.3 61.9 54.9 54.9 62.6 56.1 52.8 59.8 56.

3 59.4 58.0 59.6 53.9 61.3 53.0 51.3 57.6 52.0 52.0 50.6 54.0 60.9 61.7 56.5 59.6 51.4 54.0 55.2 54.2 56.3 56.2 57.4 54.7 51.6 50.7 59.9 61.6 51.0 60.5 52.1 55.2 56.5 59.0 50.8 55.2 59.8 55.2 Chicoutimi Gaspé Saint John 60.7 53.2 57.4 57.5 67.2 61.0 55.0 60.3 55.7 51.6 63.3 54.1 51.2 55.9 51.0 48.2 54.1 56.5 63.9 55.2 53.7 49.9 54.9 60.6 53.6 55.2 58.9 64.9 57.8 50.1 59.3 55.1 53.2 52.7 53.3 52.8 53.2 55.9 63.6 52.2 57.3 53.1 Toronto 52.1 61.6 61.0 52.5 53.6 56.7 57.9 60.3 54.9 55.1 58.2 56.2 59.6 59.7 54.2 57.9 49.2 49.0 52.3 53.6 58.9 49.8 55.8 54.9 57.0 61.Table D: Pump Price History .6 50.6 49.3 60.9 52.9 54.9 58.3 54.3 55.1 53.6 57.4 55.4 54.1 52.3 55.2 51.8 51.9 49.4 52.1 55.7 57.4 58.5 MJ ERVIN & ASSOCIATES 91 .0 56.2 Montreal 63.2 53.9 53.6 55.3 56.1 53.5 56.4 45.1 57.3 54.1 58.0 52.2 57.7 57.0 54.1 52.9 64.7 54.4 49.5 58.9 53.5 64.0 47.9 55.6 54.4 54.1 57.6 50.7 50.8 60.6 53.5 53.2 52.2 54.0 56.4 53.9 53.8 59.4 57.5 57.3 51.1 58.1 56.9 55.8 52.7 54.2 54.6 55.6 58.7 52.0 59.7 56.8 55.1 54.8 54.8 56.5 56.5 57.8 47.7 58.6 54.2 51.7 64.9 58.7 56.6 55.8 56.0 56.6 52.0 47.4 54.0 59.7 57.3 49.9 53.4 50.5 54.1 56.7 47.2 55.2 49.6 51.2 51.1 55.4 53.5 52.7 60.0 55.5 55.9 64.8 49.0 53.3 56.4 60.0 48.5 54.3 55.4 57.1 52.8 53.5 51.0 57.1 54.5 57.2 60.9 55.2 61.8 53.1 54.1 53.6 55.4 53.5 57.2 56.2 56.1 60.3 58.8 55.3 54.6 49.6 63.1 54.7 56.2 61.1 48.9 56.0 54.4 51.4 58.2 57.1 51.5 52.0 61.9 50.5 51.8 54.7 56.2 55.9 56.2 55.9 62.0 52.6 56.8 55.3 53.5 51.6 52.3 56.3 59.8 61.3 62.9 55.2 57.5 61.1 55.8 54.3 49.7 57.5 59.5 54.0 51.5 48.6 52.4 57.1 61.8 57.2 49.1 58.5 60.8 57.4 57.4 58.7 51.9 56.1 49.4 52.6 53.5 64.2 60.4 55.1 53.7 51.2 58.0 53.5 54.5 53.7 54.5 63.3 56.2 52.4 54.9 53.8 57.0 49.8 55.7 44.5 57.7 55.5 56.9 61.9 55.3 59.9 56.7 52.6 54.3 55.1 57.7 59.4 51.1 55.5 Ottawa 58.5 51.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.2 49.6 54.3 59.5 61.3 54.8 63.6 54.5 61.1 51.6 60.9 61.5 53.8 60.0 55.5 55.2 56.0 54.0 57.5 56.5 63.5 54.8 49.7 52.6 56.0 55.6 52.2 54.3 52.8 Halifax Charlottetown 60.0 58.9 54.4 58.7 46.8 61.5 60.5 54.6 58.6 58.6 58.0 54.6 59.3 61.2 55.6 56.9 55.9 55.2 56.6 61.6 55.8 52.0 60.6 Canada Avg 55.6 52.7 54.1 54.0 53.2 53.7 54.0 57.2 57.9 60.9 55.3 54.3 53.4 53.8 55.7 56.5 52.0 50.8 50.2 50.6 59.6 63.1 59.1 54.9 49.2 57.3 52.0 57.9 57.6 54.9 57.1 61.1 60.1 55.7 58.8 50.7 48.4 57.0 52.2 57.4 51.3 52.0 55.3 54.3 54.7 48.6 55.2 58.4 58.2 56.5 55.5 56.4 54.4 54.5 54.

8 26.6 26.6 May-95 29.1 24.4 29.9 25.3 28.3 29.5 23.2 27.5 24.3 30.2 24.4 20.5 27.5 29.2 Nov-93 27.4 29.7 28.6 26.3 32.9 25.2 24.1 27.6 29.1 27.8 25.9 21.9 27.3 Feb-95 26.1 25.8 Dec-93 26.0 23.7 Sep-95 30.5 25.3 29.0 23.9 24.7 26.7 29.6 23.6 29.1 28.2 24.9 23.3 33.2 29.4 22.0 Jun-93 26.9 25.3 29.8 25.3 29.0 26.0 31.1 28.8 28.5 29.4 25.4 27.8 Toronto extax 26.0 23.3 Jan-93 30.5 Feb-92 28.3 24.4 20.3 23.6 26.2 Nov-92 31.0 25.9 24.0 24.6 26.8 27.5 21.9 27.7 30.4 31.9 29.1 31.0 28.0 21.0 25.4 23.4 29.6 Sep-93 28.3 26.5 27.6 26.8 31.1 23.7 29.8 29.5 Aug-94 28.0 26.6 27.0 22.8 28.6 30.9 26.3 29.6 28.3 26.0 24.3 29.9 27.5 Jul-94 29.5 27.2 26.6 24.1 20.5 23.3 21.5 21.4 21.3 30.6 27.0 27.7 31.3 24.4 22.1 22.1 31.6 29.1 26.0 May-92 28.5 27.2 26.3 30.9 26.3 28.4 31.8 26.6 26.6 30.7 Aug-92 24.6 22.7 28.0 23.7 30.9 29.6 25.9 28.9 20.3 26.8 28.7 26.4 25.7 28.4 25.9 27.1 Apr-94 29.1 Apr-95 30.1 24.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.1 30.9 21.1 25.7 Winnipeg extax 27.9 24.8 23.8 26.0 24.6 24.9 Oct-94 32.9 28.9 28.2 24.4 28.4 27.2 28.2 25.3 29.1 19.0 32.5 24.7 27.4 27.9 25.2 25.6 28.8 27.5 24.2 26.5 Nov-95 30.4 27.3 30.8 27.4 24.1 22.4 23.4 30.7 28.1 25.7 24.2 23.2 26.4 29.8 Feb-94 24.1 26.2 28.2 27.7 29.6 26.5 29.6 25.7 26.4 22.5 26.4 30.0 31.3 23.7 Sep-94 32.6 27.2 Jun-94 31.7 30.9 26.3 24.2 28.2 29.9 Jul-93 28.3 26.9 24.1 Mar-95 29.8 25.3 29.8 27.0 23.7 29.8 27.1 Feb-93 29.4 29.2 22.7 24.4 23.7 25.6 21.7 28.4 27.3 27.2 Dec-94 26.3 Dec-95 Edmonton Regina extax extax 27.1 30.0 25.3 28.8 29.8 27.8 Jan-94 25.7 Mar-94 28.4 Jun-95 30.7 Jan-95 27.7 27.4 28.5 29.4 Dec-92 31.2 28.8 24.4 25.2 Nov-94 29.8 24.8 26.2 Apr-93 28.5 27.4 30.6 26.9 28.9 23.6 Mar-93 28.3 26.7 30.5 26.4 31.4 28.0 Apr-92 30.9 25.3 29.4 25.6 Aug-95 30.3 28.6 23.6 29.5 28.3 29.9 30.6 23.9 Aug-93 30.4 30.8 22.9 31.9 30.6 Jun-92 32.4 29.0 May-93 29.4 31.9 24.6 23.4 Mar-92 28.5 Jul-95 30.6 30.8 24.3 27.5 Sep-92 29.5 Oct-92 30.8 21.8 24.0 Oct-93 28.5 29.9 26.2 32.1 25.6 22.4 20.4 24.0 29.4 MJ ERVIN & ASSOCIATES 92 .4 31.3 Jul-92 31.Table E: Ex-tax Pump Price History .8 29.0 27.1 24.7 26.0 26.4 26.3 May-94 28.7 28.9 30.9 29.4 31.7 30.4 31.5 Oct-95 30.8 29.6 27.3 28.7 Jan-92 31.3 31.4 29.

2 33.5 25.3 25.5 24.9 30.8 29.0 36.6 36.0 34.3 34.6 27.5 30.0 32.0 26.1 29.4 26.3 31.2 25.7 MJ ERVIN & ASSOCIATES 93 .2 27.9 30.6 32.6 36.9 29.2 29.4 31.7 30.5 25.4 33.4 25.1 29.1 32.3 31.3 27.3 26.3 27.6 23.4 25.7 29.8 27.8 33.5 24.9 29.6 34.0 26.6 33.1 24.4 32.0 26.2 33.8 28.3 29.6 22.6 32.9 33.2 27.5 30.3 25.2 26.7 23.2 30.7 22.1 25.6 29.6 32.3 22.3 31.3 35.0 33.8 32.5 27.5 26.0 28.6 32.2 26.2 Saint John Halifax extax extax 34.4 33.8 26.8 23.2 26.1 32.2 27.7 24.0 28.2 27.7 32.7 27.3 26.5 32.9 27.9 26.5 28.2 28.9 29.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.8 23.6 31.6 28.8 30.3 28.8 32.5 33.7 Quebec extax 32.8 25.9 29.8 36.9 28.7 28.4 26.4 36.1 24.0 33.2 24.6 29.8 26.9 33.4 27.1 26.8 23.1 23.0 36.8 28.9 24.5 34.8 29.7 34.4 28.7 32.7 30.2 24.6 26.2 25.9 26.0 34.8 29.8 32.7 24.8 28.6 28.9 37.4 24.8 28.0 33.5 33.3 23.0 28.1 22.9 30.8 30.1 28.6 26.8 27.9 29.9 29.7 34.6 33.2 26.9 31.2 30.8 25.7 26.2 22.3 25.1 32.8 33.4 32.0 28.1 24.7 26.4 28.8 26.3 30.7 23.8 32.9 27.2 30.0 25.9 27.5 27.7 27.2 26.6 28.5 27.8 27.9 32.7 24.0 34.4 24.8 26.9 30.7 33.Table E: Ex-tax Pump Price History .5 30.1 32.3 24.7 32.5 28.2 32.7 23.8 29.4 21.6 25.0 25.9 32.0 30.5 25.3 31.3 28.2 27.9 32.3 29.1 30.2 25.7 29.7 24.1 34.4 22.9 27.8 23.0 29.0 25.7 28.4 32.6 32.0 29.8 25.6 27.6 28.9 27.6 26.5 33.5 29.8 30.2 23.5 28.2 32.8 25.5 25.0 33.8 Canada Avg extax 29.7 26.6 26.3 28.5 31.1 30.3 28.9 23.9 31.1 28.2 27.6 Charlottetown extax 36.3 26.6 34.8 24.8 28.9 30.2 25.0 30.2 22.3 29.0 23.2 36.2 22.2 21.8 27.3 31.9 32.7 28.2 27.5 25.2 32.4 25.2 28.4 33.4 33.2 27.6 23.4 34.5 27.4 25.7 28.3 29.9 28.0 29.6 24.1 30.6 31.7 26.4 31.0 27.0 33.7 28.2 28.2 27.3 28.3 33.1 Montreal extax 31.7 26.0 23.0 31.7 26.2 36.3 34.7 27.6 27.5 26.5 28.7 24.2 22.8 29.0 28.8 28.8 26.1 31.9 29.4 33.4 31.7 25.4 26.1 34.4 36.5 31.5 36.0 32.3 29.3 34.7 27.6 28.1 29.1 24.1 26.9 35.9 26.3 25.1 34.6 25.2 34.5 25.

7 17.6 20.4 21.8 23.8 20.1 21.4 24.7 16.1 20.2 21.3 23.0 19.0 21.4 22.5 24.5 20.7 22.2 16.9 18.5 22.4 20.9 22.3 23.2 20.8 21.8 19.1 20.2 20.1 22.4 21.0 23.8 19.2 17.3 20.9 24.9 21.1 20.4 21.3 21.8 23.6 19.5 22.3 23.2 23.Table F: Rack Prices .4 19.2 22.1 20.9 22.9 22.9 20.6 25.1 22.5 23.4 22.3 21.9 17.2 19.6 25.6 25.3 24.1 21.4 20.0 24.3 21.9 21.5 22.3 17.5 24.1 21.2 18.0 21.2 23.6 20.4 18.4 20.7 22.1 21.5 23.3 23.7 22.0 22.7 22.2 23.8 23.2 23.7 21.8 20.5 19.0 22.0 21.0 21.7 22.2 21.8 20.7 21.2 18.3 24.8 27.8 18.3 19.8 18.9 22.2 29.8 21.0 22.7 18.5 21.5 18.9 22.3 19.1 21.2 22.6 19.7 23.0 23.9 18.2 21.5 27.9 22.5 17.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.4 22.5 21.8 20.9 20.3 19.7 23.5 22.2 20.2 20.1 20.5 21.6 23.8 20.2 21.0 23.8 Ottawa rack Thunder Bay rack 20.7 22.7 21.0 21.5 20.2 21.2 20.6 23.8 19.9 21.0 22.8 25.8 22.4 21.1 15.1 24.9 21.1 21.3 17.8 21.0 23.4 23.4 21.2 Quebec city Montreal rack Toronto rack rack 19.6 20.4 21.4 21.4 23.7 22.4 21.8 22.4 15.3 20.4 21.5 21.9 20.9 18.1 16.4 21.1 Halifax rack 20.4 22.5 18.8 20.6 20.1 23.3 23.5 24.6 18.0 22.1 21.2 21.5 22.5 21.4 22.1 22.7 18.6 21.3 22.2 16.8 18.2 19.7 22.1 21.5 19.4 21.4 20.7 20.7 22.4 23.5 20.2 18.3 23.5 21.5 26.1 20.1 22.4 22.0 23.3 20.5 17.0 19.3 18.5 21.8 23.6 19.4 22.6 20.8 22.3 26.8 23.2 16.1 19.6 22.8 22.9 23.2 21.3 21.4 20.1 20.0 22.6 23.3 18.7 20.3 19.9 21.6 20.4 22.1 19.1 19.6 20.7 21.6 19.0 20.8 18.7 21.8 21.7 17.0 21.4 22.4 22.5 17.6 23.2 20.3 17.1 22.3 22.0 23.9 25.1 22.4 17.8 19.8 22.2 18.0 23.3 23.6 19.8 21.4 21.7 19.2 19.2 22.8 23.3 22.0 19.8 23.5 20.0 20.3 20.1 20.9 19.1 23.8 24.1 23.7 19.4 23.2 18.7 21.7 20.6 19.9 18.1 22.6 23.4 22.3 22.7 17.5 23.1 15.3 21.6 21.0 21.3 18.6 23.4 21.7 21.5 22.1 18.7 MJ ERVIN & ASSOCIATES 94 .2 21.9 21.9 22.8 21.0 23.5 21.9 23.

2 22.2 24.7 21.1 19.2 18.4 24.3 17.1 21.2 21.5 19.1 25.6 20.2 21.6 23.3 17.7 22.4 21.9 20.9 21.1 21.6 21.8 22.9 23.5 21.1 20.2 22.8 24.9 19.6 22.1 21.5 20.7 23.6 21.3 22.3 23.4 20.8 18.5 21.7 21.2 21.4 19.0 20.4 20.8 22.0 23.5 18.5 21.0 21.2 24.9 21.0 20.5 23.6 19.1 20.0 24.2 22.9 19.5 22.6 21.2 24.9 21.5 22.0 17.7 21.7 22.7 25.9 19.5 23.5 23.3 21.8 23.4 23.9 24.9 19.9 21.5 21.3 21.4 23.3 24.6 25.2 20.0 22.5 20.0 22.6 17.6 21.6 22.2 21.0 18.0 21.2 19.3 23.9 18.8 22.2 20.9 24.5 21.6 22.1 23.1 23.1 22.8 21.7 23.7 22.2 23.0 20.0 23.2 22.1 16.0 22.6 21.4 21.9 22.5 24.5 23.0 23.5 22.9 20.9 22.3 23.2 24.7 17.0 20.7 23.Table F: Rack Prices .6 23.5 24.8 20.3 23.9 22.1 24.4 24.9 19.0 21.3 24.5 17.0 22.9 21.4 24.1 16.5 19.8 23.6 23.6 21.1 25.8 25.5 22.5 21.4 22.5 18.7 22.3 24.8 24.1 23.8 20.5 24.9 19.4 22.6 22.7 18.1 22.9 23.1 22.6 21.6 23.4 25.6 25.1 22.9 22.8 22.3 23.5 MJ ERVIN & ASSOCIATES 95 .3 23.2 20.8 Vancouver Victoria rack rack 24.7 24.1 21.7 22.2 23.7 22.5 23.6 20.1 20.6 23.6 25.0 24.4 21.8 21.8 19.1 17.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.3 20.6 23.2 22.8 20.8 20.1 23.7 19.7 21.7 21.2 20.3 19.7 21.1 19.7 21.2 24.2 22.4 22.1 21.3 20.7 21.3 19.5 22.3 21.4 21.2 23.1 22.7 21.2 19.5 20.5 22.1 21.7 22.5 20.8 23.5 21.9 20.9 23.5 19.1 23.7 21.9 22.4 23.1 23.2 23.2 21.7 17.3 18.3 21.8 22.9 19.4 21.2 22.9 22.9 23.9 21.0 21.7 22.9 18.5 23.2 23.0 22.9 22.4 21.4 22.6 21.0 22.1 21.3 24.0 21.4 19.2 Edmonton Rack 23.4 23.6 17.3 17.4 22.3 22.7 23.6 19.1 22.9 21.2 23.7 22.7 21.1 23.3 22.0 22.3 22.8 20.1 18.9 22.9 21.0 24.6 21.2 20.1 23.7 20.1 18.0 24.6 20.0 25.4 24.0 17.5 21.5 21.1 23.7 22.7 23.6 20.2 22.6 24.4 21.4 21.6 21.8 23.0 18.7 24.5 23.9 21.5 24.1 21.8 21.7 21.0 22.6 23.0 23.7 25.8 24.7 24.9 23.4 18.3 23.6 23.5 19.1 23.9 24.1 25.5 Canada avg rack 22.3 20.8 21.6 24.3 20.9 23.9 17.9 22.8 22.5 21.0 23.

377 30.250 748.837 329.300 578.36 54.94 55.00 48.40 61.26 49.702 333.749 243.412 722.935 758.614 3.88 54.475 1.972 429.859 240.234 799.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.890 2.72 74.53 61.10 63.933 25.93 63.686 273.20 58.30 52.194.20 59.00 62. Urban.460 833.174.07 61.557.00 57.678.28 65.73 65.554 2.30 57.298 576.669 203.19 52.10 52.832 91.810.30 54.196 669.113 2.55 58.770 2.508 2.50 56.093.636.89 65.796 2.173 568.597 2.80 64.153 316.980 120.056.10 53.400 142.014 3.150 48.058 2.698 Note: Regional.245 351.220 389.40 54.92 51.246 2.000 63.86 56.192 2.749 91.30 66.70 55.72 63.671 399.796 529.18 51.23 63.17 Diesel 64.45 63.30 54.983 1.03 58.119 632.101 256.830 2.20 54.30 63.000 217.211 15.000 1.102 98.745.249.060.00 66.60 70.850 126.98 59.20 60.53 48.22 59.945.370 41. and All Study Markets are weighted (by market population) averages.985 636.42 53.420.34 63. MJ ERVIN & ASSOCIATES 96 .922 103.60 60.204.018.000 1.997 397.60 49.90 67.02 51.60 50.620.83 68.89 61.332 101.72 58.268 478.702.00 57.529 123.905 183.214 248.25 57.20 61.85 54.834 71.549 111.87 61.97 63.949 1.45 53.052 84.40 63.89 60.70 49.74 57.120 570.35 73.790 185.628 702.23 53.90 63.26 63.30 68.483 2.296 179.712 1.88 64.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.13 58.903 33.10 59.238 2.38 56.516.687 1.145.500 378.Table G: Study Market Data .166 102.643 184.101 447.334.50 55.16 59.141.625 64.858.897 350.241 451.448.483 63.19 49.90 62.895 600.811 120.009 54.018 2.85 48.438 591.40 58.50 56.513 19.66 50.00 67.26 44.78 67.32 51.40 59.704.971 473.621 102.414 450.48 56.030.65 54.24 61.11 58.97 51.543 2.894 1.

83 24.81 21.34 20.03 21.88 22.92 30.32 21.40 27.15 24.95 22.42 27.30 29.51 25.28 22.57 22.49 21.16 21.97 22.97 25.32 33.94 23.45 20.99 28.88 28.39 21.82 21.55 28.33 21.41 27.59 28.63 20.59 22.08 23.38 24. MJ ERVIN & ASSOCIATES 97 .15 27.45 25.43 21.59 28.93 23.03 24.45 24.88 22.93 23.59 28.63 21.96 24.50 20.43 20.73 26.23 24.27 20.92 21.74 21.01 22.33 21.69 27.81 27.63 24.45 20.15 29.45 24.45 29.07 26.33 21.84 28.25 31.45 29.83 24.69 23.18 28. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.35 25.23 25.26 27.82 28.63 28.56 22.42 24.45 23.64 28.37 27.54 28.91 21.20 27.90 27.97 23.45 28.87 26.Table H: Study Market Data .90 26.33 22.38 24.09 24.09 27.02 23.43 28.83 25.39 Note: Regional.16 29.39 21.40 25.88 20.07 24.95 22.99 26.45 20.04 24.58 25.43 20.23 23.33 21.55 28.57 29.25 27.78 Product taxes Midgrade Regular 26.65 21.25 24.76 24.11 26.75 22.47 27.95 25.84 28.49 25.89 28.45 22.25 28.07 24.33 21.49 21.81 25.41 22.98 28.76 25.03 20.16 22.63 25.04 26.13 23.07 26.83 24.39 22.43 21.51 25.81 28.73 32.15 20.85 28.23 26.07 24.88 20. and All Study Markets are weighted (by market population) averages. Tax (by Grade) Rack Pt.42 24.28 23.63 26.36 24.45 20. Urban.59 22.88 28.96 24.96 22.92 22.65 26.51 31.98 25.31 22.34 26.08 25.50 25.89 29.75 27.65 27.47 28.83 22.20 20.36 26.33 22.68 Diesel 36.53 23.18 25.59 24.51 20.17 20.33 22.83 23.06 28.Rack Price.47 20.39 22.26 28.95 Premium 26.33 27.49 31.21 27.01 28.48 25.21 27.89 26.93 27.34 25.42 25.92 20.27 29.89 25.

79 0.07 0.59 4.10 6.31 23.35 27.49 2.95 6.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.50 10.77 5.58 1.25 1.22 5.38 22. Costs.97 0.60 7.72 26.88 5.64 3.Table J: Study Market Data .02 22.17 26.16 54. Urban.12 23.34 1.33 9.03 28.20 14.86 49.75 28. Average Deviation is the average deviation of the market values from their mean (average) value.16 20.98 31.48 7.91 0.11 26.12 6.26 5.26 3.94 17.78 2.44 56.52 5.81 28.07 30.43 0.19 5.02 0.22 14.37 26.62 56.56 4.15 66.83 36.84 5.64 1.00 22.28 27.82 32.83 27.08 55.08 17.38 2.38 28. Variance uses the formula [n∑x2 .60 23.66 28.43 23.81 26.35 58.68 2.18 55.52 30.63 60.73 2.82 95 Retail Gross Product Margin 6.95 21.06 0.44 25.47 58. and All Study Markets are weighted (by market population) averages.04 28.45 1.17 1.91 29.93 22.76 5.63 58.28 56.68 7.90 59.77 30.01 31.85 21.73 1.08 0.02 3.50 0.03 7.27 60.53 6.79 33.10 3.51 11.73 10.68 7.27 11.35 60.44 33.35 28.30 12.01 0.11 31.88 31.98 0.53 21.04 0.29 24.41 29.17 11.18 21.28 1.83 1.70 22.13 11.91 22.04 23.34 0.60 14.00 4.45 6.58 66.31 28.50 3.21 8.24 23.31 34. MJ ERVIN & ASSOCIATES 98 .90 23.89 21.22 1.21 8.64 2.18 7.39 56. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.94 22.84 28.99 2.06 5.21 24.13 28.73 22.38 7.04 22.24 7.93 56.96 27.47 0.54 50.36 20.00 58.06 28.91 2.23 38.98 0.83 21.31 0.00 0.96 3.96 25.20 5.75 23.77 37.82 3.05 6.27 62.80 1.42 2.26 27.14 60.89 28.85 26.29 7.16 3.83 12.86 28.92 22.50 58.41 7.49 57.56 24.71 33.38 0.(∑x)2 ]/n2.28 1.89 0.94 Note: Regional.98 1.32 31.53 22.30 5.02 13.33 .08 3.23 7.24 7.29 8.07 0.17 9.99 0.85 24.57 12.96 28.14 7.Blended Prices.36 0.13 0.27 6.80 9.64 3.41 12.85 11.033 0.

948 3.394.852) $ 119.510 $ 60. but for ancillary revenue.875 $ 255.648 3.827.640 4.630 3.058.890.719 3.772.010 1.780 $ 85.966 3.074 $ 131.066 3.250.956) $ 200.000 2.223.746 $ (374.481 $ 96. Outlet Costs.871) $ (128.265.081 $ 222.429 $ 238. these averages are based on all applicable study markets.855 $ 278. Revenue.098.911) $ (166.557) $ 102.032 $ 77.011.067 $ 92.143) $ (249.071.694 3.564 $ 252.478 4.688 $ 85.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.197.526 $ 207.209 $ 82.900 2.263 $ 60.289 981.716 Note: Regional.004.550 $ 177.993 $ 113.332) $ (238.068 3.604.302 $ 69.502 $ (80) $ 60.622 $ 174.295 $ 174.766) $ (274.129 $ 97.779 $ 121. and All Study Markets are weighted (by market population) averages.572) $ (286.244 95 net retail Ancillary Revenue petroleum revenue $ 208.247 4. and consolidated outlet income these averages are based only on those markets with available data.866) $ (244.626 $ 81.157.550 694.544 $ 175. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.224 $ 189.800 $ 225.900 $ 179.117 $ 207.367) $ (164.805.102 $ 223.241) $ (227.638 2.658.279 $ 154.272 $ 118.750 $ 271. For 95 net retail petroleum revenue.542 $ 222.095.646) $ (98.014.135 $ 199. MJ ERVIN & ASSOCIATES 99 .995 $ 234.013 $ 227.217 2.837 $ 56.913 $ 139.856 3. outlet costs.707 $ 260.885.144 2.623 2.098 $ (320.023 $ (15.Sales.375) $ (49.934 3.465.Table K: Study Market Data .542.209 $ 26.000 $ 156.677 $ 180.089.246 $ 118.467 $ 96.520 5. Urban.120 $ 54.794 3.000) $ (241.272 $ 210.208) $ (226.632 $ 256.

250 981 2.84 12 5.41 0.40 9 4.29 1.02 0.22 0.000 pop’n No.90 13 4. N refers to study sample size (total = 481).45 0.542.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.95 3 9.310 1.68 4 7.145 81.50 8.715 14.47 7.91 17 4.22 3.98 7.40 1 3.790 1.85 15 11.23 8 31.89 7.20 0.36 5.870 120.38 0.01 7 2.06 16 4.089 3.Demographic Profiles Population pop’n 299 .658 3.845 15.88 12 7.06 1 5. inverse ranking is used (lowest value = 1).157 2.315 710.180 616.13 2 11.50 9. of Outlets No.20 17 14.60 11 7.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.071 2.058 1.43 12. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.27 1.004 3.47 14 3.51 9 11.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.50 3 10.60 3.095 3. of Brands No.775.827 3.21 0.08 3.97 8.30 0.475 3.88 11 8.Table L: Study Market Data .10 3.55 19 11.53 10 6.275.80 10 4.41 1.23 6 7.30 1.04 15 4.604 3.33 0.098 4.585 6.48 7 7.89 2 4. rank* 3.00 11.17 19 9.96 5.06 5.745 16.28 17.550 1.54 6 2.465 694 3.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.91 12.970 330.42 5 14.73 14.45 14.605 16.08 16 3.79 6.975 2.52 13 5.675 179.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.775 678. MJ ERVIN & ASSOCIATES 100 .014 5.76 18 5.27 0.223 3.265 2.98 6.394 2.29 8 7.73 5 10.08 4 2.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.24 0.400 74. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.

Contact: Maureen Monaghan Address: 580 Booth Street. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). cardlock. Principal Address: #400. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. health. Ervin. Ottawa ON.14th Street NW Calgary AB. Contact: Cindy Christopher. generate jobs and growth. Ottawa ON. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. Ottawa ON. safety and business issues.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. Petroleum Products Address: 235 Queen Street. Contact: Michael J. Vice President Public Affairs Address: 275 Slater Street. aviation and lubricants marketing channels. They work with major oil companies in benchmarking performance in the retail. and provide background resources to industry public affairs managers and the media. a series of studies whose goal is to strengthen Canada’s competitiveness. bulk. The SCF is the basis for this study. and in doing so. accessible through a public fax-back dial-in system. Senior Advisor. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . 119 .III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. Contact: Brendan Hawley. They maintain a large database of historical prices at most major centres. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry.

The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. Its monthly publication “Refined Petroleum Products” (cat. Contact: Len Bradley. 101 . Octane is published quarterly. SW Calgary. Managing Editor Address: Suite 2450.6th Avenue. Energy Section Address: Statistics Canada.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. Contact: Robert Curran. no 45-004) is a useful source of supply and demand volume data. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry. and is a useful “window” on this industry. Contact: Gerard O’Connor. Supervisor. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 .Octane Magazine Octane is Canada’s refining and marketing trade journal. 311 . Ottawa ON.ab.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. Calgary AB.6th Ave. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. Executive Director Address: 214.